The Commmissioner of Income Tax vs Swedish Telecoms International AB

J.P. Devadhar, J.—At the instance of the revenue, the Income Tax Appellate Tribunal u/s 256(1) of the Income Tax Act, 1961 has forwarded the following question of law for the opinion of this Court:

Whether on the facts and in the circumstances of the case, the Tribunal is right in law in accepting the claim of the assessee that fees for technical services of U.S. $ 2,17,250 accrued under the consultancy agreement dated 23-6-1985 with Videsh Sanchar Nigam Ltd. be considered as '' Industrial or Commercial Profits'' and therefore exempt from taxation as per Article III(1) of the Double Taxation Avoidance Agreement between India and Sweden dated 30th July, 1958 ?

The assessment year involved herein is AY 1988-89.

The respondent (''assessee'' for short) is a non resident company registered and incorporated in Sweden.

On 23/6/1985 the assessee had entered into an agreement with "Videsh Sanchar Nigam Limited" ('' VSNL'' for short) to render consultancy services in implementation of India U.A.E. Submarine Cable System Project. Part (a) of the said agreement related to planning and technical studies prior to placing Turnkey Contract with the Submarine System manufacturers and part (b) of the agreement related to supervising installation of all terminal equipments and the cables in the terminal buildings and also to supervise the overall testing and commission activities.

In the assessment year in question, VSNL, apart from other payments had paid to the assessee supervision charges amounting to US $ 2,17,250 for carrying out work as per part (b) of the agreement. The assessee claimed that the said amount represented technical service fees which is exempt from income tax by virtue of the Double Taxation Avoidance Agreement (''DTAA'' for short) between India and Sweden dated 30th July, 1958. The assessing officer rejected the claim of the assessee by holding that the fees for technical services were not reflected in the DTAA and, therefore, the provisions of the Income Tax Act, 1961 (''1961 Act'' for short) would apply and accordingly the amount received by the assessee was taxable.

On appeal filed by the assessee, the CIT (A) observed that under the DTAA the '' technical service fees'' were not included within the meaning of industrial & commercial profits and, therefore, the exemption contained in the DTAA would not be applicable in the present case. Accordingly, the CIT(A) upheld the assessment order.

On further appeal filed by the assessee, the ITAT disagreed with the views expressed by the assessing officer as well as the CIT(A) and following its decision in the case of ITO v. Rheinbraun Consulting GmbH, the Tribunal held that the technical consultancy fee received by the assessee may not be industrial profit but it was definitely a commercial profit and, therefore, Article III of the DTAA between India and Sweden entered into in the year 1958 would apply. Accordingly, the Tribunal held that the technical supervision fees received by the assessee was covered under DTAA and hence exempt from payment of tax. On a reference application filed by the revenue, the Tribunal has forwarded the aforesaid question of law for the opinion of this Court.

Mr. Vyas, learned Counsel appearing on behalf of the revenue submitted that under Article III of the DTAA 1958 what is exempted is the industrial or commercial profits of an foreign enterprise in India which does not have a permanent establishment in India. Since the the assessee does not have a permanent establishment in India, the industrial or commercial profits of the assessee, if any, would be exempt under Article III of DTAA 1958.

However, Mr. Vyas submitted that as per Article III(3) of DTAA 1958, the term '' industrial or commercial profits'' do not include '' management charges'' and since the '' technical supervision fees'' received by the assessee were nothing but management charges the same were outside the purview of DTAA 1958.

Mr. Toor learned Counsel appearing on behalf of assessee, on the other hand, submitted that the word ''management charges'' in Article III (3) of DTAA 1958 refers to the business management charges and not technical management charges. He submitted that the supervision charges received were relating to technical management charges and, therefore, the amounts received by the assessee were squarely covered under DTAA 1958.

Strong reliance was placed by Mr. Toor on the decision of Karnataka High Court in the case of AEG Telefunken Vs. Commissioner of Income Tax, wherein it is held that the technical supervision fees if not specifically excluded from the definition of the term '' industrial or commercial profits'' ; the same cannot be excluded by inference. Reliance was also placed by the counsel for the assessee on the decision of Tribunal in the case of Rheinbraun Consulting GMBH wherein similar question has been answered in favour of the assessee therein.

We have carefully considered the rival submissions. The short question to be considered in the present case is, whether the technical supervision charges received by the assessee are the management charges which are excluded from the purview of '' industrial & commercial profits'' under Article III (3) of the DTAA 1958 ?

Article III of DTAA 1958 reads thus:

(1) Tax shall not be levied in one of the territories on the Industrial or commercial profits of an enterprise of the other territory unless the profits are derived in the first-mentioned territory through a permanent establishment of the said enterprise situated in the first-mentioned territory. If profits are so derived, tax may be levied in the first-mentioned territory on the profits attributable to the said permanent establishment.

(2) There shall be attributed to the permanent establishment of an enterprise of one of the territories situated in the other territory the industrial or commercial profits which it might be expected to derive in that other territory if it were an independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing at arm''s length with the enterprise of which it is a permanent establishment.

If the information available to the taxation authority concerned is inadequate to determine the profits to be attributed to the permanent establishment, nothing in this paragraph shall affect the application of the law of either territory in relation to the liability of the enterprise to pay tax on an amount determined by the exercise of a discretion or the making of an estimate by the taxation authority of that territory: Provided that such discretion shall be exercised or such estimate shall be made, so far as the information available to the taxation authority permits, in accordance with the principle stated in this paragraph.

(3) For the purposes of this Agreement the term '' industrial or commercial profits'' shall not include income in the form of rents, royalties, interest, dividends, management charges, remuneration for labour or personal services or income from the operation of ships or aircraft but shall include rents or royalties in respect of cinematographic films.

On a plain reading of Article III (3) of DTAA 1958, it is clear that the management charges whether relating to business management or technical management would be outside the scope of exemption under Article III of DTAA 1958. In other words, for the purposes of DTAA 1958, the '' management charges'' are not to be treated as commercial profits. Therefore, the management charges received by the assessee, whether relating to the business management or technical management would be outside the scope of DTAA 1958.

By relying on the decision of ITAT in the case of Rheinbraun Consulting GmbH (supra) it is contended that the assessee was not managing any of the affairs of the VSNL and, therefore, the '' technical service fees'' received by the assessee cannot be treated as '' management fees'' . There is no merit in the above contention, because as per the agreement entered into by and between the assessee and VSNL on 23-6-1985 (para 2.3.3) the assessee was not only to render technical consultancy services under Clause (a) of the agreement, but also to supervise installation of all terminal equipments and the cables in the terminal buildings as well as supervising the overall testing and commissioning activities as per part (b) of the agreement. Thus, in the present case, apart from rendering technical consultancy services under part (a) of the agreement, the assessee under part (b) of the agreement was also to manage or supervise installation of terminal equipments as well as commissioning activities. The fees payable in respect of the above activities are nothing but the management fees which are specifically excluded from the purview of '' industrial & commercial profits'' as per Article III (3) of DTAA 1958.

The argument of the assessee that in the light of the decision of the Tribunal in the case of Rheinbraun Consulting GmbH (supra), the technical supervision fees received by the assessee are liable to be treated as commercial profits under Article III (1) of the DTAA 1958 cannot be accepted, because, though, in the ordinary course the '' commercial profits'' would include '' management charges'' in view of the specific exclusion contained in Article III (3), the '' management charges'' would be outside the purview of DTAA 1958. Therefore, in the facts of the present case the technical supervision charges received by the assessee being '' management charges'' , the decision of the Tribunal in holding that the said amounts are commercial profits cannot be accepted. Moreover, it is pertinent to note that in the case of Rheinbraun Consulting GmbH (supra) the Tribunal was not called upon to consider the scope and the meaning of the word '' management charges'' in Article III (3) of the DTAA 1958, whereas in the present case, it was specifically argued before the Tribunal that in view of Article III (3) of DTAA 1958, the management charges received by the assessee cannot be considered as '' commercial profits'' . Therefore, in the facts of the present case, the Tribunal was not justified in holding that the charges received by the assessee are commercial profits exempt under Article III of the DTAA 1958.

Reliance placed on the decision of the Karnataka High Court in the case of AEG Telefunken (supra) is misplaced, because, in that case, admittedly there was no clause in the agreement under which managerial duty was to be carried out by the assessee therein. In the present case, as noted above, Clause 2.3.3 of the agreement entered into by and between the assessee and VSNL on 23/6/1985 specifically refers to the managerial duties of the assessee. Para 2.3.3 of the agreement dated 23/6/1985 reads thus:

2.3.3 i) Swedtal (assessee herein) shall supervise and submit reports to owners on the Contractor''s performance during the loading, jointing, laying, installation and overall commissioning activity of the Submarine Cable, the submerged repeaters and equalisers.

ii) Swedtal shall also supervise the laying and jointing of the land cable sections of coaxial cables and sea-earth cables.

iii) Swedtal shall supervise installation of all terminal equipments and the cables in the terminal buildings and also the overall testing and commissioning activities.

Swedtal shall scrutinise the Contractor''s test results during the activities mentioned above, analyse the performance, and make recommendations concerning acceptance, taking into account the performance with respect to the agreed specification and the future performance and reliability of the system.

In the light of the aforesaid specific clause contained in the agreement dated 23/6/1985, it is clear that the amounts in question received by the assessee for executing the aforesaid work was nothing but management fees which cannot be considered as '' commercial profits'' under Article III of the DTAA 1958. Therefore, in our opinion, the Tribunal committed an error in holding that the technical service fees received by the assessee are commercial profits covered under Article III of 1958.

In the result, the question referred to us is answered in the negative that is, in favour of the revenue and against the assessee. The reference is disposed of accordingly with no order as to costs.