Telangana High Court
Sheladia Associates Inc vs Assistant Director Of Income Tax on 25 January, 2024
Author: P.Sam Koshy
Bench: P.Sam Koshy
HONOURABLE SRI JUSTICE P.SAM KOSHY
&
HON'BLE SRI JUSTICE LAXMI NARAYANA ALISHETTY
WRIT PETITION No.18382 OF 2023
ORDER:
(per Hon'ble Sri Justice Laxmi Narayana Alishetty) This writ petition has been filed 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/26042023/ 467465 and request number:467465, for the Financial Year 2023-24, passed by respondent No.1 under Section 197 of the Income Tax Act, 1961 as being illegal, arbitrary, in excess of the 1st respondent's jurisdiction and in violation of established principles of natural justice and directing respondent No.1 to grant the petitioner a NIL rate TDS deduction certificate under Section 197 of the Income 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.I.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 filing the present Writ Petition are that the petitioner is a Professional Consulting Firm with PSK,J & LNA, J W.P.No.18382 of 2023 2 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 [TRC] from the department of Treasury, dated 01.12.2022. 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 petitioner and M/s. Intercontinental Consultants & Technocrats Private Limited (hereinafter referred to as 'ICT), a company incorporated in India, entered into a joint venture agreement dated 28.06.2021, for the purpose of engaging the petitioner company's Independent Engineering Services with respect to ICT's project in Bangladesh. The said project entailed upgrading a Joydev-Debogram-Bhulta-Mandanpur Road (N-105, also known as the 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, 1961 (for short 'the Act') vide PAN No. PSK,J & LNA, J W.P.No.18382 of 2023 3 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 30.03.2021. 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 PSK,J & LNA, J W.P.No.18382 of 2023 4 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 30.03.02021 and the undertaking given by the petitioner company. Respondent No.1 sought certain clarifications from the petitioner company on 03.05.2023 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.1 to pass an order under Section 197 of the Act, 1961.
7. It is further 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 application 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 filed on various grounds.
PSK,J & LNA, J W.P.No.18382 of 2023 5
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."
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 PSK,J & LNA, J W.P.No.18382 of 2023 6 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 income is attributable to the PE from the fees from the consultancy services earned by the petitioner company for the said project and is only taxable 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 03.05.2023, board resolution dated 30.03.2021 and undertaking from the petitioner company, the impugned orders have been passed erroneously.
PSK,J & LNA, J W.P.No.18382 of 2023 7
12. Respondent No.1 has filed counter affidavit, inter 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 the 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 duly 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 payments being made by an Indian entity 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 PSK,J & LNA, J W.P.No.18382 of 2023 8 partner in-charge of overall administration of the project and that the project is being managed from India. Thus, the petitioner is rendering services to the Indian lead Partner and hence, the Assessing Officer 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 the 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 that 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(1) of the Act. In the instant case, the expenditure regarding 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 PSK,J & LNA, J W.P.No.18382 of 2023 9 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 tentative 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 197 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.
17. 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:
PSK,J & LNA, J W.P.No.18382 of 2023 10
(i) Larsen & Toubro Limited Vs. Assistant Commissioner of Income-tax (TDS) 2(1) 1
(ii) Areva T&D, SA Vs. Assistant Director of Income-
tax 2
(iii) Ansaldo Engergia SpA Vs. Income-tax Officer 3.
19. In the case of Areva T&D, SA (supra), the Delhi High Court has held that authorization/certificate issued under Section 195/197 of the Act is provisional in nature and cannot be equated with regular assessment or other proceedings under the Act. The certificate has been issued as an interim measure on the request of the petitioner and it cannot be compared with the final determination of tax liability by making an assessment under Section 143(3) of the Act. 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. On a conjoint reading of sections 195 and 197 of the Act, we are of the view that if any opinion is expressed at the time of grant of certificate it is tentative or provisional or interim in nature and the same would not debar the Assessing Officer from initiating a proceeding under Section 147 of the Act on the ground that there has been a change of opinion."1
(2010) 190 Taxman 373 (Bombay) 2 (2011) 10 taxmann.com 319 (Delhi) 3 (2003) 133 Taxman 795 (Madras) PSK,J & LNA, J W.P.No.18382 of 2023 11
20. Further, in Ansaldo Engergia SpA (supra), the issue before the Madras High Court was a challenge to the cancellation of certificate 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 197(1) and (2) r/w 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-5 held as under:
"5. .. even if the certificate for deduction at source at a lower rate is withdrawn, the consequence of such withdrawal would be that deduction has to be made at a higher rate, but ultimately the question of liability is to be decided in assessment proceedings. The liability of the petitioner is not being finally determined at the time of the withdrawal of the certificate. If ultimately it is found that the petitioner is liable to pay tax at a rate lower than the deduction to be made, it is obvious that the amount paid is to be refunded."
21. Further, it is relevant to refer clauses of joint venture agreement dated 28.06.2021, which reads as under:
"2.1. Once executed by all of the Members, this Agreement shall be effective as of the date on which the performance of Services begins in accordance with GCC Clause 17.1 and 18.1 of the Services Agreement. The Members had constituted themselves as an Unincorporated Joint Venture and submitted a Proposal to the Client for rendering consultancy services as specified in the Scope of Services hereinafter. Each Member had used all reasonable skill and diligence in the preparation and PSK,J & LNA, J W.P.No.18382 of 2023 12 submission of the Proposal to the Client. The Proposal was submitted once the terms were unanimously agreed by the Members and in line with the terms of the JV Agreement signed between the Parties on 15th January 2020 and Fee proposal sharing agreed by the Parties on the same date. 2.1.1. Upon award of the Project to the Joint Venture on 6th April 2021, Lead Member has entered into a Services Agreement with the Client ("Services Agreement") on 6 April 2021, whereby the Members have agreed to perform all the Services to be undertaken for the Project by the Joint Venture under the Services Agreement.
2.1.2. The Joint Venture parties shall be jointly and severally liable to the Client to the extent of services provided by each party for performing the services and the obligations of the Joint Venture as set forth in the Contract, in accordance with the terms and conditions thereof. The Joint Venture party's share of the Contract amount and liabilities shall be proportionate to their inputs in carrying out their services for the Project. ....
14.1. All payments to the Members pursuant to the Services Agreement or otherwise shall be made in accordance with Schedule 3 and the financial policy of the Joint Venture (including payment of interest on any amounts which a Member may become liable to pay the other Member pursuant to this Agreement) is as set out in that Schedule.
...
14.4. As between the Members, each Member shall have full and sole responsibility for the payment of any taxes, duties, fees or assessments of a similar nature whatsoever levied in connection with its services under this Agreement, including subcontracts and including but not limited to, any personal income taxed, levied or imposed on any of its employees or personnel or any of its subcontractor's employees or personnel. The responsibility on payments by a Member to non-residents PSK,J & LNA, J W.P.No.18382 of 2023 13 lies with the said Member, especially with regard to any specific local tax.
....
17.1. This agreement has been entered and shall in all respects be construed and interpreted in accordance with laws of 'India'.
...
Schedule 1, clause 1.2:-
The Project is: Independent Engineering (IE) Services for Upgrading of Joydevpur - Debogram - Bhulta - Madanpur (Dhaka By-Pass) Road (N-105) into 4 lanes through Public Private Partnership, Bangladesh.
...
Schedule 2, Scope of Services (Clause 5.2) :- The brief responsibilities of ICT and Sheladia have been mentioned below:
(i) Sheladia shall provide the key Senior Structural Engineer and undertake the scope of services under this position as outlined in the Job Description in the Services Agreement, with due attention to deadlines and coordination with the team.
(ii) ICT shall lead the project with support of Sheladia and shall discharge its duties in a fair, impartial and efficient manner, consistent with the highest standards of professional integrity and Good Industry Practice.
(iii) The Client will provide in-country facilities, including furnished and equipped office space, transport and logistic support.
(iv) ICT and Sheladia shall carry out their work as laid down in the Service 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 PSK,J & LNA, J W.P.No.18382 of 2023 14 Three Thousand Only) per month per position for service of 'Senior Geotechnical Engineer', 'Financial Expert' and 'O & M' Specialists on this project.
23. Perusal of pleadings and material on record show that subject project is being undertaken in Bangladesh and no part of the said project 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 and the same is governed by DTAA. As per Article 12 of the DTAA, only fees for 'included services' are taxable in the source State and not the fees for the technical services, which is in question in the present proceedings. Further, 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 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 factual background, and in the absence of any material placed 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 relegate 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.
____________________________________ P.SAM KOSHY, J ____________________________________ LAXMI NARAYANA ALISHETTY, J Date: 25.01.2024 Dua/kkm PSK,J & LNA, J W.P.No.18382 of 2023 16 HONOURABLE SRI JUSTICE P.SAM KOSHY & HON'BLE SRI JUSTICE LAXMI NARAYANA ALISHETTY WRIT PETITION No.18382 OF 2023 Date: 25.01.2024 Dua/kkm