Delhi High Court

Asstt. Cit vs Samcor Glass Ltd. on 5 February, 2002

Equivalent citations: (2004) 89 TTJ Del 138

ORDER

R.K. Gupta, Jm:

This is an appeal by department against the orders of Commissioner (Appeals) dated 15-1-1997, under section 195 of the Income Tax Act. The following ground of appeal has been taken by the department :

"On the facts and in the circumstances of the case, the learned Commissioner (Appeals) has erred in holding that the deduction of tax at source by Samcor Glass ITD., the Indian company in respect of payment to Corning Incorporated, USA, should have been only at 10 per cent instead of 30 per cent determined by the Assistant Commissioner in respect of total payment of US Dollars 34.02 lakhs and modifying the order of the Assistant Commissioner accordingly."

2. The appeal was fixed for hearing on 14th Jan., 2002. The counsel of the assessed filed synopsis. Copy of the same was given to the learned departmental Representative and the matter was adjourned for 18th Jan., 2002. The appeal was heard partly on this date and the matter was again adjourned for 21st Jan., 2002. On this date, the learned departmental Representative fairly accepted that the facts narrated in the synopsis filed by the counsel of the assessed are correct. It was further submitted by the learned departmental Representative that in reply the department has filed a reply in writing, therefore, the same may be considered. Further, reliance was placed on the order of the assessing officer. On the other hand, the learned counsel of the assessed strongly placed reliance on the order of the Commissioner (Appeals). It was further submitted that the written synopsis which contains submissions also should be considered.

3. We have considered rival submissions and have also considered written synopsis and the replies filed by both the parties.

4. The brief facts as stated in the synopsis, which are undisputedly correct, are as under :

4.1 M/s Samcor Glass ITD. (hereinafter referred to as "Samcor"), is a joint venture of M/s Corning Incorporated (hereinafter referred to as "Corning") and the Sarntel Group. Samcor entered into the following two agreements with Corning :

(i) Agreement dated 21-3-1991, for licencing of know-how for the manufacture of glass components for glass shells, sealing of glass shells, etc.

(ii) Agreement dated 1-6-1992, for supply of equipment, i.e., plant and machinery.

4.2 Under the first agreement termed as "Know-how license agreement" (hereinafter referred to as "know-how contract"), Samcor acquired know-how as defined in para 1.8 of the know-how contract, as under :

1.8 "Know-how". The knowledge or experience obtained, possessed, advanced or developed by Coming concerning the use and practical application of all current technology for the commercial production of panels and funnels for B1W television glass prior to or as of the effective date and during the term of agreement, including, among other things, formulae, processes, technical informations, product specifications, materials specifications and procedures for testing and controlling quality, all as evidenced in part by written documents, drawings, designs, or machines, equipment or parts thereof."

4.3 For effective implementation of the know-how under the said agreement, Coming was to render technical assistance and services as defined in para 1.15 of the agreement. In consideration of the rights and privilges granted by Coming to Samcor, Samcor agreed to pay Coming royalty in respect of the contract products subject to Indian taxes (para 5.1 of the know-how contract). For the technical assistance pertaining to effective implementation of the knowhow while erecting the plant, a separate payment was envisaged at man month basis as per para 3.1 of the agreement. It is important to note that Corning was not to supervise itself the erection, installation and start up of the plant but was merely to assist Samcor in the same. This is evident from para 3.1 itself.

4.4 Under the second agreement, Samcor sought supply of equipment vide agreement dated 1-6-1992 (hereinafter referred to as "supply contract", under which having entered into agreement for technology transfer and license for technology, the requisite plant was purchased (para 1.5 of the supply contract). Para 1.8 of the supply contract provides that installation of the plant will be by Samcor and its subcontractors under supervision of Corning's engineers whenever applicable of all equipments ready for commissioning. The performance of the equipment was also the responsibility of Samcor. Corning also provided warranty over twelve calendar months which extends the date of the successful completion of the performance test as defined in the know-how contract (para 11.1 thereof) under which Coming warrants that the know-how shall be completed in all respect and shall enable Samcor to manufacture contract products of the quality, specification and description agreed. Thus, supervision of the effective working of the equipment was under the contract of June, 1992, for supply of equipment. Assistance under the know-how contract dated 21-3-1991, only concerned the correct implementation of know-how do hors the plant/equipment.

4.5. Thus, under the supply contract, Coming was responsible for not only manufacture, design but also of the performance of the machinery for which inspection/supervision need be carried out. However, no separa te charges for such supervision were given, as it was included in the contract price.

4.6 Samcor, in order to remit the fee for technical services under the know-how contract, applied to the assessing officer after payment of tax at 10 per cent under art. 12(4) of the Indo-US Double Tax Avoidance Agreement (hereinafter referred to as DTAA). According to the assessing officer, since para (6) of art. 12 prescribed that the rates envisaged under sub-arts. (1) and (2) of art. 12 will not apply. If Coming has a permanent establishment in India, the rate applicable, even though, it was fee for included services falling within arts. 12 1 and 12.2 was to be 30 per cent and not 10 per cent. The assessing officer held that Coming has a permanent establishment in India in terms of art. 5(2)(k) of the DTAA, rejecting the stand of the petitioner that Coming, inter alia, has not provided supervisory services in connection with a building site or construction site, installation or assembly project in India. He did not accept that Coming has merely provided technical assistance by way of deputation of its personnel at Samcor factory, just to ensure that carrying out work of installation and start up is in accordance with Coming's designs, drawings and instructions, and only as a measure for final checks to ensure that the product is of correct specification for ensuring performance guarantee as contained in the know-how contract.

5. The assessed preferred appeal before the Commissioner (Appeals), who, after considering the submissions and perusing the other material or record, held that Coming is not carrying on any business in India at all. Merely providing technical or supervisory services by an, American company at the site of an Indian enterprise will not make such installation on site a permanent establishment of the American company and, therefore, such a case will not fall under art. 5(2)(k) of DTTA. Accordingly, it was held that 'TDS was to be deducted at 10 per cent instead of 30 per cent determined by the assessing officer. Against these findings of the Commissioner (Appeals), the department is in appeal here before the Tribunal.

6. The case of the department is that art. 12 and art. 7 of the DTAA are separate. Therefore, the contention raised by the learned counsel that by art. 7(7), whereby included services are excluded, is not correct because both the articles are indendent. Under art. 7, the business profits are to be considered and under art. 12, the included services are taken into consideration. It was further stated that under art. 12(6), the method of computation of tax and income-tax in respect of categories of royalty, fees for included services and for business profits are prescribed. It was further stated that services rendered by Coming in India are more than 180 days, therefore, it clearly falls under provisions of art. 50(k) of DTTA, which clearly establishes that there was a permanent establishment. Accordingly, it was submitted that TDS @ 30 per cent was to be deducted, therefore, the assessing officer was right.

7. Before proceeding further, we would like to see arts. 5(2)(k), 7.7 and 12.6 of the DTTA, which are as under:

"5(2)(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;"

'7.7 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 art. 12 (royalties and fees for included services) and including income from the rental of tangible personal property other than property described in para. 3(b) of art. 12 (royalties and fees for included services)."

'12.6 The provisions of paras 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 art. 7 (business profits) or art. 15 (independent personal services) as the case may be, shall apply."

8. After perusing the submissions of both the sides and the provisions of DTTA, we find that there is no infirmity in the order of Commissioner (Appeals). No doubt, the provisions of art. 5(2)(k) are in regard to permanent establishment, but in our considered view, art. 5(2)(k) is riot applicable on the facts of the present case, because Coming has not provided the services for supervision of construction of building and erection of plant. They have only provided services, just to assist the officials of Samcor, that whether the factory building has been constructed as per specifications given by M/s Coming and whether the plant supplied by Coming has been erected properly as per specification provided by Coming, U.S.A.

9. After considering the other provisions of the DTAA, we further find that tax @ 30 per cent cannot be levied on the amount of included fee, because if the rate of 30 per cent is to be applied, then deduction on account of expenses have to be allowed, which are incurred for the purpose of business of permanent establishment, including a reasonable allocation of executive and general administrative expenses, research and development expenses, interest and other expenses incurred for the purpose of the enterprise as a whole. The provisions of art. 7.3 are very clear in this regard. Therefore, a special provision has been enacted by sub-cl. (7) of art. 7, whereby it has been specifically stated that business profits means income derived from any trade or business including income from furnishing of services other than included services, as defined in art. 12. Undisputedly, the amount is paid on account of included services only, which is defined in art. 12. Therefore, in our considered view, art. 7.7 is an overilding article to art. 12, being special in nature. The Governments of respective countries have the power to vary the terms and conditions as per OECD model convention under art. 7, by which the business profits of an enterprises are to be taxed only in the country in which it carries on business, unless it has a permanent establishment in the other State. Undisputedly, M/s Coming has not taken any permission to establish its permanent establishment in India because Coming was assisting to Samcor in regard to erection of plant and machinery that whether they are erected as per specifications supplied by Coming. There is no permanent establishment of Coming in India. Accordingly, there is no question of taxing the income of Coming in India on a higher slab. Permanent establishment, has already been defined in art. 5, whereby certain conditions are put forth, but there is no clause that on services in regard to assisting Samcor, the treatment of stay of officials falls under the definition of permanent establishment.

10. Therefore, in view of all these facts and circumstances, we hold that the Commissioner (Appeals) was right in allowing the appeal of the assessed. Accordingly, we confirm the order of the Commissioner (Appeals) on the reasoning given by. him and on the reasoning given by us as above.

11. In the result, the appeal of the department is dismissed.