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
