Pramod Kumar, Accountant Member.

1. This appeal is directed against the order dated 27th February, 1998, passed by the Commissioner of Income Tax (West Bengal I), under section 263 of the Income-tax Act, 1961 (hereinafter referred to as ‘ the’) and in the matter of ‘no objection certificate’ issued by the DCIT, Spl. Range 11, Kolkata, authorizing CESC Limited to remit a sum of UK £ 52,000 to one M/s. Mott Ewbank Preece of UK, after deducting the tax at source @ 5% of the gross amount.

2. Although the assessee has raised nine grounds of appeal, we deem it fit and proper to begin with addressing ourselves to the core grievance of the assessee that the ‘no objection certificate’ sought to be revised by the impugned order was not prejudicial to the interest of the revenue inasmuch as, consequent to the ‘no objection certificate’ in question, the assessee had to deduct tax at source @ 5% whereas no tax was really required to be deducted at source from the remittance in question.

3. Briefly, the facts, CESC Limited, also known as Calcutta Electricity Supply Corporation and hereinafter referred to as the ‘assessee tax deductor’, is an Indian company engaged in the business of generation and distribution of electricity. This company sponsored, jointly with Rolls Royce plc. of UK, setting up of a coal fired thermal power plant on Balagarh Island, near Kolkata. In addition to these two sponsorors, Asian Development Bank (ADB), Commonwealth Development Corporation (CDC) and International Finance Corporation (IFC) and certain Indian Investors like Industrial Credit and Investment Corporation of India Ltd. (ICICI) were to hold the equity in the project company. It was in this backdrop of facts that one M/s. Mott Ewbank Preece, a unit of Mott McDonald Limited, (hereinafter referred to as ‘MEP’) was appointed as ‘technical advisor’ to the financial institutions. We may mention that the expression ‘financial institution’ collectively referred to Asian Development Bank (ADB), Commonwealth Development Corporation (CDC), Industrial Credit and Investment Corporation of India Ltd. (ICICI), UK Export Credit Guarantee Corporation and ANZ Grindlays Bank plc., and that International Finance Corporation (IFC) was coordinator in the present project. To highlight the purpose and scope of MEP’s work, we may only refer to the following extracts from the agreement dated 6th October, 1995, for appointment of MEP as ‘technical advisor’, a copy of which was placed before us at pages 1 to 17 of the assessee’s paperbook.

"Term and purpose

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(c)The purpose of obtaining MEP’s expert opinion on various elements of the Project as specified by the Scope of Work is to provide a basis for the Financial Institutions to assess critical technical, economic, commercial and environmental aspects and risks related to the Project with a view to providing financing or other credit support to finance the construction and start-up costs expected to be incurred up to Project completion.

(d)MEP will act as representative of the Financial Institutions and on instructions from the coordinator and/or from time to time the other Financial Institution. Its responsibility will be directly to the financial Institution.

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2. Scope of Work

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Technical appraisal of the project for the Financial Institution. . ."

The aforesaid agreement further provided that "MEP shall not undertake any other obligation or commitments to the borrower, its shareholders or their affiliates which would, or might reasonably be expected to, give rise to a conflict of interest with its obligations to Financial Institutions thereunder without first notifying and obtaining the consent of the Financial Institutions."

4. There is no dispute about the fact that it was in consideration for the services so rendered by MEP that the assessee tax deductor incurred a liability to pay UK £ 52,000 and that the assessee tax deductor moved a petition dated 10th November, 1995, which described the payment in the nature of ‘fees for professional services’, seeking Assessing Officer’s permission to remit the aforesaid payment without any deduction of tax at source. On 6th December, 1995, however, the Assessing Officer issued a ‘no objection certificate’ to the assessee tax deductor whereby it was authorized to make the remittance after deduction of tax at source @ 5%.

5. It is this ‘no objection certificate’ which is subject-matter of impugned revision order passed by the Commissioner.

6. The Commissioner, being of the view that the above receipt in the hands of MEP was taxable @ 20%, initiated revision proceedings under section 263 on 21st January, 1998. After giving an opportunity of hearing to the assessee and after taking into account assessee’s objection to the proposed revision, learned Commissioner concluded as follows:

"The payment for fees for such, services is well with the scope of "fees for technical services" and therefore taxable under the DTAA and the Indian Income-tax Act, 1961. Further, the rate prescribed as per DTAA between India and U.K. is 20%. In view of this position, Assessing Officer has to adopt the rate of 20% for deducting the tax at source. The order under section 195 deducting tax at 5% is, therefore, erroneous and prejudicial to the interest of revenue. I, accordingly, set aside the order under section 195 dated 6-12-1995 and direct Assessing Officer to pass an order in conformity with the provisions of DTAA and Income-tax Act, 1961 as discussed above."

7. Aggrieved by this order of the learned Commissioner, the assessee is in appeal before us.

8. We have heard Shri Kaushik Mukerjee, learned counsel for the assessee, and Shri D.K. Ghosh, learned Departmental Representative. We have also carefully perused orders of the authorities below, as indeed the paper book filed before us, and have duly deliberated upon the Double Taxation Avoidance Agreements (DTAAs) and judicial precedents cited at the bar. We find that it is an unambiguous legal position that by the virtue of section 90(2) of the Act, where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply only to the extent they are more beneficial to that assessee. Thus, provisions of such double taxation avoidance agreements override the provisions of the, to the extent these agreements are more favourable to the assessee. In our considered view, therefore, only in the event of assessee’s case failing on the provisions of the DTAA, the question of examining provisions under the Income Tax Act arises. We may, in this regard, quote the following observations made by the Hon’ble jurisdictional High Court in the case of CIT v. Davy Ashmore India Ltd. [1991] 190 ITR 626 (Cal.):

". . .The conclusion is inescapable that, in case of inconsistency between the terms of the Agreement and the taxation statute, the Agreement alone would prevail.

The Central Board of Direct Taxes has issued a Circular No. 333 on April 2, 1982 [See (1982) 137 ITR (St.) 1], on the question as to what the Assessing Officers will do when they find that the provisions of the Double Taxation Avoidance Agreement are not in conformity with the provisions of the Income-tax Act, 1961. Then it was laid down by the Board in the said Circular as follows:

‘The correct legal position is that where a specific provision is made in the Double Taxation Avoidance Agreement, that provision will prevail over the general provisions contained in the Income-tax Act, 1961. In fact the Double Taxation Avoidance Agreements which have been entered into by the Central Government under section 90 of the Income-tax Act, 1961, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the contrary have been made in the Agreement.

Thus, where a Double Taxation Avoidance Agreement provided for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income-tax Act. Where there is no specific provision in the Agreement, it is the basic law, i.e., the Income-tax Act, that will govern the taxation of income.’

In our view, the Circular reflected the correct legal position inasmuch as the Convention or Agreement is arrived at by the two contracting Governments in deviation from the General principles of taxation applicable to the Contracting States; otherwise, the double taxation avoidance agreement will have no meaning at all."

We will, therefore, take up taxability of impugned payments to the MEP, in the light of provisions in applicable India UK Double Taxation Avoidance Agreement.

9. Let us first take a look at the scope of expression ‘fees for technical services’ so far as applicable India UK Double Taxation Avoidance Agreement is concerned.

10. Article 13(4) of the India UK DTAA defines "fees for technical services" as payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provisions of services of technical or other personnel) which :

(a)are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this Article is received; or

(b)are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of the Article is received; or

(c)make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design.

11. As far as services covered by 13(4)(a) and (b) are concerned, the provisions are self explanatory and there is no controversy about scope of these two categories. The controversy, however, arises about the scope of services covered by 13(4)(c) and in particular by the scope of expression ‘make available’ used therein. We may also mention that, according to the learned Commissioner, the services rendered by the MEP are covered by the scope of Article 13(4)(c) of the DTAA.

12. The provisions of Article 13(4)(c) clearly depart from the normal definition of ‘fees for technical services’ in DTAAs that India has entered into with foreign countries which is somewhat on the lines of definition given in Explanation 2 to section 9(1)(vii) of the Income Tax Act. The key difference, in our considered view, is that as against reference to ‘rendering of’ technical services in the statute and most of the DTAAs, the stress here is on ‘making available’ technical knowledge, experience, skill, know-how or processes etc. This paradigm shift in the definition of ‘technical services’ is noticed in the Indo USA Double Taxation Avoidance Agreement dated 12th September, 1989. The provisions of Article 13(4)(c) of the Indo UK DTAA are in pari materia with the definition of ‘fees for included services’ under Article 12(4)(b) of Indo US DTAA which is as follows :

"(4) For the purposes of this Article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services.

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(b)make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design."

13. In the protocol note attached to and forming part of the aforesaid DTAA, Government of India has confirmed that memorandum of understanding between the India and USA with regard to interpretation of Article 12 (Royalties and Fees for Included Services) also represents the view of the Indian Government. This memorandum inter alia provides as follows :

"Paragraph 4(b) of Article 12 refers, to technical or consultancy services that make available to the person acquiring the service technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design to such person. (For this purpose, the person acquiring the service shall be deemed to include an agent, nominee, . . . or transferee of such person.) This category is narrower. . . because it excludes any service that does not make technology available to the person acquiring the service. Generally speaking, technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provisions of the service may require technical input by the person providing the service does not per se means that technical knowledge, skills, etc., are made available to the person purchasing the service, within the meaning of paragraph 4(b)."

14. We have no reasons to believe that Government of India had any other views for identical provisions in India UK DTAA. When provisions are in pari materia, there cannot be different meanings assigned to the provisions, unless there is anything repugnant in the context. We find nothing to support any deviation from the interpretation canvassed in the memorandum of understanding, attached to and forming part of Indo US DTAA, extracts from which have been reproduced above. As stated by Lord Mansfield, "where there are different statutes in pari materia though made at different times, or even expired, and not referring to each other, they shall be taken together, as one system and as explanatory of each other". R. v. Loxdale 97 ER 394 at page 395. In our considered view, principle of interpretation of statutes should also govern the interpretation of DTAAs, particularly when those DTAAs deal with the same thing and are identical in material respects. We may also refer to the observations of Griffith, CJ. in the case of Webb v. Outrim AC 81 PC, at page 89 that, "When a particular form of legislative enactment, which has received authoritative interpretation whether by judicial decision or by a long course of practice, is adopted in framing a later statute, it is a sound rule of construction to hold that the words so adopted by the Legislature to bear the meaning which has been so put on them." A fortiorari, when a particular DTAA clause has received an authoritative interpretation, from an authority no less than the Government of India itself, and identical clause is adopted in framing a later DTAA, it is to be held that the clause so adopted in the later DTAA will also normally have the same meaning as assigned to that clause.

15. We, therefore, find that it is a fairly settled position that consideration for rendering of technical services, as is the thrust of Explanation 2 to section 9(1)(vii) of theand definition of ‘fees for technical services’ as adopted in most of the DTAAs that India has entered into with various countries, is materially distinct from ‘consideration for technical or consultancy services that make available to the person acquiring the service technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design to such person’ as is the expression used in India UK and India USA DTAAs.

16. We may also mention that this paradigm shift in definition of the ‘fees for technical services’, so far as Article 13(4)(c) of India UK DTAA is concerned, is a conscious departure from the traditional model which represented broadly by the definition of technical services as given in the Indian Income-tax Act. Even after India entered into DTAA with United States on 12-9-1989, wherein this departure from traditional definition was made for the first (sic) entered into several DTAAs wherein traditional definition, on the lines of definition in Indian Income-tax Act, 1961, continues to find the place, such as in India Australia DTAA dated 25-7-1991, India Belgium DTAA dated 26-4-1993, India France DTAA dated 29-9-1992, India Germany DTAA and India Israel DTAA dated 29-1-1996. On the other hand, there are several DTAAs wherein the narrower definition of ‘technical services’, as in the case before us, has been adopted e.g., in India Switzerland DTAA dated 2-11-1994 and, of course, India UK DTAA dated 25-1-1993. The choice of narrower definition for the expression ‘fees for technical services’ in India UK DTAA, therefore, is clearly a conscious departure from, what can be termed as, traditional definition of ‘fees for technical services’. In this view of the matter, we get no assistance from the construction the expression ‘fees for technical services’ has received, in the context of traditional definition of that expression. The question then arises as to what is the precise scope of definition of technical services referred to in Article 13(4)(c) of the India UK DTAA.

17. In our considered view, in order to be covered by the provisions of Article 13(4)(c) of the India UK DTAA, not only the services should be of technical in nature but such as to result in making the technology available to the person receiving the technical services. We also agree that merely because the provision of the service may require technical input by the person providing the service, it cannot be said that technical knowledge, skills, etc., are made available to the person purchasing the service. As to what are the connotations of ‘making the technology available to the recipient of technical services’, as is appropriately summed up in protocol to Indo US DTAA, "generally speaking, technology will be considered ‘made available’ when the person acquiring the service is enabled to apply the technology." We are in considered agreement with the views so expressed in the protocol to Indo USA DTAA which, as we have mentioned earlier, also represents views of the Government of India on this subject.

18. It takes us to the key question whether, on the facts of the case before us, it could be said that payment to MEP was in consideration for the rendering of any technical or consultancy services which "made available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design."

19. Let us now take a look as to what were the services being rendered by MEP and to whom were these services rendered. As per Article 1(c) of the Agreement appointing MEP as ‘technical advisor’ to the ‘financial institutions’ (also referred to as ‘the independent engineer’ and ‘engineer’ in the agreement), MEP was to give expert opinion on various elements of project to ‘provide basis to the financial institutions to assess critical technical, economic, commercial and environmental aspects and risks related to the project, with a view to providing finance or other credit support to finance the construction and start up costs expected to be incurred up to project completion’. As to the precise scope of work in phase one, which is relevant for our purposes, Article 2 of the agreement states that the duties undertaken will be "technical appraisal of the project for financial institution to be made before financial close in accordance with the scope of work outlined in terms of reference set out in Appendix A". Appendix A, in turn, inter alia states as follows :

"The Engineer (MEP) will review the project documentation with respect to technical feasibility and economic viability on behalf of the Asian Development Bank, Commonwealth Development Corporation, International Finance Corporation ECGD, and ICICI (India) (the "Senior Lenders"). This engineering review will encompass the proposed design, procurement, construction, start-up and testing, and operation and maintenance of the Project. The Engineer will identify risks or issues which, if not corrected or mitigated, could result in commercial failure of the project, or losses to the lenders. In such cases, alternative solutions will be suggested for the consideration of Senior Lenders, and the project developer, BPCL. The Engineer’s role is that of reviewing and opining rather than designing or directing the project. The Engineer’s review is limited to engineering issues and their potential effect upon commercial performance; legal and regulatory issues will not be stated except to the extent expressly stated."

20. A further break up of the duties to be performed by MEP, as given in the aforesaid agreement (relevant portion of the agreement at pages 12 to 16 of the paper book), explains the work to consist of the tasks in the nature of (i) review of proposed conceptual design of the project; (ii) review of project contracts and agreements to check for appropriate-ness particularly with regard to obligations of the project company under the agreements, and comment on, inconsistencies or flaws that would impair technical performance of the project, or the satisfactory and efficient operation of the project, and its economic viability; (iii) visit the power purchaser WBSEB and discuss and comment on the reasonable- ness of schedule and arrangements for construction of the interconnec- tion with WBSEB, adequacy of the protective devices in the plant configuration, viability of proposed metering system, plant dispatch arrangement, transmission line load flows by season, and overall system compatibility with the proposed plant; (v) review of turnkey contractor’s scope of work and corresponding pricing estimate methodologies for the three contract and the Rolls Royce parental guarantee which comprises the turnkey contract arrangements; (v) review of the proposed arrange-ments for the initial supply of coal from Coal India Limited; (vi) review of operation and maintenance agreement and the owner’s O & M plan for completeness and consistency with the requirements of all other project agreements and to ensure that responsibilities for O & M are clearly assigned and reasonable; (vii) review of the environmental impact agree-ment; (viii) review of technical parameters and assumptions that are significant to the projected financial performance of the project; (ix) report on any other issues detected that might jeopardize the effective construction and operation of the plant; and, finally (x) prepare draft task reports for each of the major tasks described above and send these to Senior Lenders for review and comment upon completion of each task.

21. We have carefully perused the details of precise nature of work performed by MEP, as discussed above vis-á-vis the scope of ‘fees for technical services’ referred to in Article 13(4)(c), as discussed in paragraph 16 earlier in this order. In our considered view, while the service rendered by MEP undoubtedly has substantial technical inputs, it does not result in, to use the phraseology employed in the India UK DTAA, ‘making available the technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design’. We may also mention that the agreement, under which services were provided by MEP and genuineness of which has not at all been called to question by the revenue, categorically mentions that MEP’s "role is that of reviewing and opining rather than designing or directing the project", as evident from the extracts reproduced in paragraph 18 above. We are of the considered view that merely expressing opinion on or reviewing the project details can amount to ‘making available’ the technology in the sense that the recipient of services "is enabled to apply the technology". We find that MEP was merely to watch the interests of financial institutions and the services it was required to render, for doing so, had some technical inputs in it. The recipient of services in this case are certain foreign financial institutions and the only reason of taxability of payment for these services is the source rule i.e., because the payment is made by an Indian resident. In fact, the agreement itself specifically states that MEP’s role is that of reviewing and opining rather than designing or directing the project. Reviewing and opining per se does not result in making available the technical knowledge and skills etc. There is nothing before us to even remotely suggest that any technology was made available to the financial institutions or, for that purpose, to the project itself. In order to services being covered by the definition of ‘technical services’ for the purpose of Article 13(4)(c) of India UK DTAA, services should not only be technical in nature but these services should make available the technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. In our considered view, therefore, revenue’s case clearly fails on the second limb of this test. As we have stated earlier, it is not even revenue’s case, and rightly so, that the services rendered by MEP are covered by clauses (a) and (b) of Article 13(4). We are, therefore, of the considered view that the payment for services rendered by MEP cannot be said to covered by the meaning of ‘fees for technical services’ within the meanings of Article 13(4) of the India UK DTAA.

22. In the light of these discussions, we are of the considered view that since the payment made by the assessee tax deductor, to the M/s. Mott Ewbank Preece (MEP) was not in the nature of ‘payment of fees for technical services’ under Article 13(4) of the DTAA and since the M/s. Mott Ewbank Preece admittedly did not have any Permanent Establishment (PE) in India, income embedded in the related payments to MEP was not exigible to tax in India. Accordingly, the assessee tax deductor was not under any obligation to deduct tax at source from the remittance made to the aforesaid M/s. Mott Ewbank Preece. It is also not in dispute, in the light of Hon’ble jurisdictional High Court’s judgment in the case of Davy Ashmore India Ltd. (supra), provisions of such double taxation avoidance agreements override the provisions of the, to the extent these agreements are more favourable to the assessee. Accordingly, provisions of the Income-tax Act, 1961 will not apply to the case before us. In this view of the matter, and bearing in mind the fact that the no-objection certificate 6th December 1995 authorized the assessee to make the remittance after deduction of tax at source @ 5%, we are of the considered view that the ‘order’ sought to be revised by the learned Commissioner was not prejudicial to the interest of the revenue inasmuch as consequent to the ‘no objection certificate’ in question, the assessee had to deduct tax at source @ 5% whereas no tax was really required to be deducted at source from the remittance in question. Hon’ble Supreme Court, in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 831 has inter alia observed that "A bare reading of this provision makes it clear that the prerequisite to exercise of jurisdiction by the CIT suo motu under it, is that the order of theO is erroneous insofar as it is prejudicial to the interests of the Revenue." Their Lordships further observed that "The CIT has to be satisfied of twin conditions namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent - if the order of theO is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue - recourse cannot be had to section 263 of the." On the facts of the case before us, we find that while the no objection certificate sought to be revised by the Commissioner was indeed erroneous as it saddled the assessee tax deductor with a liability to deduct with-holding tax @ 5% whereas the assessee tax deductor did not have any liability to deduct any with-holding taxes since the income embedded in payments to MEP was not exigible to tax in India, we are also of the view that the no objection certificate in question was not at all prejudicial to the interest of the revenue because revenue’s interests were not adversely affected, in any manner whatsoever, by the aforesaid no objection certificate. We find that not only that issuance of aforesaid no-objection certificate did not result in any loss of revenue, it did not even prejudice any interests of the revenue. Therefore, the conditions for invoking section 263 of the Act, as elaborated by Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. (supra), were not satisfied. It leads us to the conclusion that the facts and circumstances of the case did not warrant or justify Commissioner’s exercise of powers under section 263. Accordingly, learned Commissioner did err in assuming jurisdiction under section 263 on the facts of this case. We, therefore, deem it fit and proper to cancel the impugned order passed by the learned Commissioner. We order accordingly.

23. Before parting with the matter, we may place it on record that as we have decided the matter on the issue as to whether or not the no objection certificate sought to be revised by the learned Commissioner was at all prejudicial to the interest to the revenue, we do not deem it necessary to adjudicate on the other issues, raised by the assessee in this appeal before us, including the issue as to whether a non-statutory ‘no objection certificate’ issued by the Assessing Officer can at all be subject-matter of revision under section 263 of the. In the light of our findings above, this and remaining grounds of appeal become infructuous. We, accordingly, refrain from making any observations on merits of the same.

24. In the result, appeal is allowed.

Per B.K. Mitra, Judicial Member - I have gone through the draft order recorded by my Ld. Brother in minute details. I am unable to agree with the finding of the Ld. Accountant Member on the following reasons :

I have noticed that the Ld. Commissioner has passed the following order :

"(i)On a perusal of the agreement between assessee and MOTT the purpose of obtaining MEP’s expert opinion is to provide a basis for the Financial Institutions to assess criticle Technical, economic, commercial and environmental aspects and risks related to the project with a view to providing financing or other credit support to finance the construction and start up costs expected to be incurred up to project completion.

(ii)On careful reading of the agreement and considering the scope of the services rendered by MEP. It is evident that the role of engineers is not only reviewing and opining but also making available technical knowledge, skill, experience and transfer of the same in the implementation of the project. The scope of review is wider than merely expressing an opinion, it leads to and results in transfer of knowledge, skill etc. without which project cannot be implemented. The payment of fees for such services is well within the scope of the term "Fees for Technical Services" and therefore taxable under the DTAA and the Indian Income-tax Act, 1961. Further, the rate prescribed as per DTAA between India and U.K. is 20%. In view of this position, Assessing Officer has to adopt the rate of 20% for deducting tax at source. The order under section 195 deducting tax at 5% is therefore erroneous and prejudicial to the interests of revenue."

Exercise of power given under section 263 of theis dependent upon certain conditions as mentioned in the section. It is true that exercise of power is dependent upon the consideration by the Commissioner but consideration by the Commissioner must be based on objective conditions laid down in section 263 of the. When powers are conferred on statutory authorities to exercise the same when "they are satisfied" or when "it appears to them" or when "in their opinion" or if they consider that "certain state of affairs exist" or when powers enable the statutory authorities to take such action as they think fit in relation to a subject-matter the Tribunal would not readily differ to the conclusiveness of an Executive Authority’s opinion as to the existence of a matter of law or fact upon which the validity of the exercise of the power is predicated where reasonable conduct is required the criterion of reasonableness is not subjective but objective. The onus of establishing unreasonableness, however, rests upon the person challenging the validity of the action in the instant case. We have noticed that the exercise of the power is dependent upon the Commissioner considering the order of the Assessing Officer to be erroneous insofar as it is prejudicial to the interests of the revenue. Therefore, there must be material before the Commissioner before he passes the order to come to the conclusion that the order sought to be rectified was erroneous insofar as it is prejudicial to the interests of the revenue. To such a conclusion the Commissioner can come on relevant material fact in respect of which reasonable opportunity must be given to the person sought to be affected and as such reasonable opportunity given (sic) on the principle of natural justice requires that the assessee to be affected should be given intimation of the material. It is also true that if the basic materials upon which the Commissioner proposes to act are intimated or communicated to the assessee the Commissioner may in his order rely on such supporting materials. It is found that such basic materials upon which the Commissioner proposes to act in an action under section 263 must be intimated to the assessee concerned. In the instant case, we have noticed that such basic materials upon which the Commissioner proposes to act have been communicated to the petitioner. Furthermore, in the instant case there is a challenge thrown by the assessee that there were no materials on the facts and circumstances of the case for the Commissioner to come to the conclusion that the order in question is erroneous insofar as it is prejudicial to the interests of the revenue.

2. An order must be erroneous so as to prejudicial to the interests of the Revenue. In this connection it may however be stated that anything which is prejudicial to the interests of the revenue would be erroneous and that anything which is not lawful would be prejudicial to the interests of the revenue. In this connection reliance may be placed in the order of the Hon’ble Supreme Court in the case of Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 [LQ/SC/1972/564] and also on the observation of the Karnataka High Court in the case of CIT v. T. Narayana Pai [1975] 98 ITR 422. [LQ/KarHC/1974/120]

3. The power conferred under section 263 is of wide amplitude. It enables the Commissioner to call for and examine the proceedings under that. It empowers the Commissioner to make or cause to be made such enquiry as it deems necessary in order to find out if any order passed by Assessing Officer is erroneous insofar as it is prejudicial to the interests of the revenue. After examining the record and after making or causing to be made an enquiry, if he considers the order to be erroneous, then he can pass the order thereon as the circumstances of the case justify. In this connection reliance may be placed to the judgment of the Apex Court in the case of CIT v. Sree Manjunathesware Packing Products & Camphor Works [1998] 231 ITR 531. The only limitation on the power of the Commissioner is that he must have some materials which would enable him to form a prima facie opinion that the order passed by the Officer is erroneous insofar as it is prejudicial to the interests of the revenue. Once the Commissioner comes to the conclusion on the basis of the material that the order of the Officer is erroneous and prejudicial to the interests of the revenue the Commissioner is empowered to pass an order as the circumstances of the case may warrant. The Commissioner is empowered to cancel the assessment and direct a fresh assessment. In the instant case, we have noticed that the payment of fees for such services rendered by the engineer is well within the scope of the term "fees for technical services" and, therefore, taxable under the DTAA and the Indian Income-tax Act, 1961. In am therefore of the opinion that the Commissioner has rightly directed the Assessing Officer to adopt the rate of 20% for deducting tax at source instead of 5% which was ordered by the Assessing Officer under section 195. The action of the Assessing Officer was erroneous and prejudicial to the interests of the revenue and, therefore, the Ld. Commissioner was quite justified in invoking his power under section 263 of the Income-tax Act, 1961.

4. In the result, the appeal is dismissed.

ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961

1. As there is a difference of opinion between the Judicial Member and the Accountant Member, the matter is being referred to the Hon’ble President of ITAT with a request that the following questions may be referred to a Third Member or pass such orders as the Hon’ble President may kindly decide :

"Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that income embedded in the payment of UK £ 52,000 paid to M/s. Mott Ewbank Preece was not exigible to tax in India, or whether the Tribunal should have held that the same being covered by the scope of "fees for technical services" under the applicable Double Taxation Avoidance Agreement, the CIT was justified in holding that the order under section 195(2)

Passed by the Assessing Officer was indeed prejudicial to the interest of the revenue, inasmuch as it directed the assessee to deduct tax @ 5% whereas correct rate of tax should have been 20%"

THIRD MEMBER ORDER

Per Shri M.A. Bakhshi, Vice-President. - As a result of difference of opinion amongst the Members constituting the Division Bench, I was nominated as Third Member in respect of the difference of opinion. Parties have been heard and record perused. The controversy in this case arises as a result of an order under section 263 by the Ld CIT., West Bengal-I in respect of an order under section 195 passed by the Assessing Officer on 6-12-1995 allowing the appellant, viz., M/s. Calcutta Electric Supply Co. Ltd. (hereinafter called the ‘CESC Ltd.’) to remit a sum of Pound Sterling 52,000 to Mott Ewbank Preece, U.K. on deducting income-tax @ 5%. The relevant facts of this case are briefly stated as under even at the cost of repetition for coherence and ready reference.

2. The State Government of West Bengal had marked a site at Balagarh island in the river Hooghly, 70 kms. North of Kolkata for building a Coal Fired Thermal Power Plant for power generation. Subsequently in an effort to attract private sector investment into power generation, the State Govt. invited CESC Ltd. to develop the proposed site as an indepen-dent power project of ultimate capacity of 1,500 Mega Watt (MW). The project was sponsored by CESC Ltd. from India and Rolls Royce plc. of U.K. In addition to the sponsors, Asian Development Bank (hereinafter called ‘ADB’), Commonwealth Development Corpn. (hereinafter called ‘CDC’), International Finance Corpn. (hereinafter called ‘IFC’) and Indian investors were to hold equity in the project company termed as Balagarh Power Co. Ltd. (hereinafter called ‘BPCL’). The project cost was estimated at US Dollar 752 Million. IFC was coordinator in the said project. M/s. Mott Ewbank Preece, a unit of McDonald Ltd. (hereinafter called as ‘MEP’) was appointed as technical advisor of the financial institution viz., ADB, CDC, ICICI (Industrial Credit and Investment Corporation of India Ltd.), UK Export Credit Guarantee Corpn. and ANZ Grindlays Bank plc. An agreement dated 6-10-1995 was executed, copy of which is placed on record (pages 1 to 17 of the paper book). As per the terms of the said agreement, the assessee was required to pay MEP an amount of 52,000 Sterling Pound for services rendered and reimbursement of expenses. It may be pertinent to mention that in terms of the requirement of Reserve Bank of India, a no objection certificate from the Income-tax authority is required for remitting any foreign exchange abroad. The CBDT in Circular No. 659, dated 29-11-1994 [211 ITR (ST.) 28] prescribed a form for the said purpose. The assessee had filed an application dated 10-11- 1995 with the Assessing Officer seeking authorization for payment of the abovenoted amount without deduction of tax at source. The Assessing Officer issued a letter dated 6-12-1995 permitting remittance of the sum after deduction of tax at source @ 5% of the amount payable. The assessee though had claimed that no deduction is required to be made at source, yet accepted the order of the Assessing Officer of deducting tax @ 5% and the remittance was made after the deduction of the said tax. It may be pertinent to mention that the order under section 195 passed by the Assessing Officer asking the assessee to deduct tax @ 5% as against the claim of the assessee of nil deduction of tax is appealable under section 248 of the Income-tax Act, 1961. However, the order of the Assessing Officer was not challenged before any authority.

3. Subsequently, the assessee had furnished similar applications to the Assessing Officer in regard to further payments to MEP. The Assessing Officer in the respective orders passed under section 195 had directed the assessee to remit the payments after deduction of tax @ 20%. The learned counsel informed me during the course of hearing that such orders of the Assessing Officer passed under section 195 have been challenged by way of appeal and the matter is pending in the Tribunal. It may be relevant to point out that in the application filed with the Assessing Officer for issue of no objection certificate, the assessee had indicated the purpose of payment as ‘fee for personal services’.

4. The CIT issued a notice under section 263 to the assessee to show-cause as to why the order dated 6-12-1995 passed by the Assessing Officer authorizing remittance to MEP after deduction of tax @ 5% may not be set aside as being erroneous and prejudicial to the interests of Revenue as the actual rate of tax deductible in respect of the said payment was @ 20%. The notice issued by the CIT is placed at page-20 of the paper book. The assessee objected to the proposed action by virtue of letter dated 16-2-1998 followed by letter dated 17-2-1998. These letters are placed at pages 21 to 32 of the paper book. The CIT, however, overruled the objection raised by the assessee and passed an order dated 27-2-1998 under section 263 holding that the authorization vide order dated 6-12-1995 of the Assessing Officer was erroneous and prejudicial to the interests of the Revenue and that the Assessing Officer was to deduct tax at source @ 20% as per the Double Taxation Avoidance Agreement (DTAA) between India and U.K. as the payment made by the assessee to MEP was in the form of "fee for technical services".

5. The assessee challenged the order dated 27-2-1998 passed by the Commissioner under section 263 by way of an appeal to the Tribunal, as provided under the. The Ld. Accountant Member has expressed the view that the order passed by the Assessing Officer is erroneous insofar as the assessee has been asked to deduct tax @ 5%, but since as per his opinion no tax was payable in respect of the payment made to MEP, the order passed by the Assessing Officer was not prejudicial to the interests of Revenue. He has, accordingly, for the detailed reasons given in his draft order proposed to cancel the order of the Commissioner passed under section 263 of the. However, the Ld. Judicial Member by a dissenting order has held that the payment made to MEP is a payment for fee for technical services and, accordingly, the order passed by the Commissioner under section 263 was justified. Following point of difference has been identified by the Bench :—

"Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that income embedded in the payment of UK Pound 52,000 paid to M/s. Mott Ewbank Preece was not exigible to tax in India, or whether the Tribunal should have held that the same being covered by the scope of "fees for technical services" under the applicable Double Taxation Avoidance Agreement, the CIT was justified in holding that the order under section 195(2) passed by the Assessing Officer was indeed prejudicial to the interest of the revenue, inasmuch as it directed the assessee to deduct tax @5% whereas correct rate of tax should have been 20% "

6. The learned counsel for the assessee contended that the power of the Commissioner under section 263 for revising an order vests only if two conditions are satisfied. Firstly, the order passed by the Assessing Officer must be erroneous and secondly the said order should be prejudicial to the interests of Revenue. It was contended that as held by their Lordships of the Supreme Court in the case of Malabar Industrial Co. Ltd. (supra), both the conditions must coexist for the exercise of the power under section 263 by the CIT. The learned counsel further contended that the order of the CIT under section 263 is unsustainable in law insofar as the provisions of DTAA between India and U.K. [206 ITR (St.) 235] relating to the taxation of fee of the nature involved in this case are more favourable to the recipient than the provisions of the Income-tax Act, 1961. In such a situation, the provisions of DTAA override the provisions of the Income-tax Act, 1961. Reliance has been placed on the decision of the jurisdic- tional High Court in the case of Davy Ashmore India Ltd. (supra) Refer- ence has also been made to CBDT Circular No. 333 dated 2-4-1982 [137 ITR (St.) 1]. It was conceded that learned counsel for the assessee that as per Explanation to section 9(1)(vii) of the Income-tax Act, 1961 the payment made to MEP would fall within the ambit of ‘income by way of fee for technical services’. So, however, the payment not falling within the definition ‘fee for technical services’ under the DTAA with U.K., the payment to MEP is not liable to tax at all. In this connection reference was made to paragraph 4 of Article-13 of the DTAA between India and U.K. which defines the term ‘fees for technical services’ and it was contended that since the MEP has not made available technical knowledge, experi-ence, skill, know-how or processes nor was any technical plan or technical design transferred to the payer, the amount paid to MEP did not fall within the ambit of ‘fee for technical services’ or ‘consultancy services’. The learned counsel invited may attention to the definition of the term ‘fee for technical services’ in the DTAA entered into between India and Germany [223 ITR (St.) 130 at 142], wherein the term has been defined to mean the payments of any amount in consideration for the services of managerial, technical or consultancy nature, including the provision of services by technical or other personnel, but does not include payments for other services mentioned in Article-15 of the said DTAA. it was contended that the definition of the ‘fee for technical services’ under the DTAA between India and Germany is wider than the definition of DTAA between India and U.K. My attention was also invited to the DTAA entered into between India and U.S.A. [187 ITR (St.) 102] where the definition for ‘fees for included services’ is given to mean payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services :

(a)are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or

(b)make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or technical design.

It was contended that the definition for ‘fee for included services’ is in pari materia with the definition of ‘fee for technical services’ provided under the DTAA between India and U.K. Reference has also been invited to the explanatory memorandum relating to paragraph-4(b) of Article-12 of the DTAA between India and U.S.A. wherein it has been clarified that the technology will be considered made available when the person acquiring the service is enabled to apply the technology. It has also been claimed that the fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skill etc. are made available to the person purchasing the service within the meaning of paragraph-4(b). It has further been clarified that the use of a product which embodies technology shall, not per se be considered to make the technology available. My attention was invited to the agreement entered into between MEP and project developer and financiers. It was contended that the scope of the advice under the agreement was to identify the risks or issues which, if not corrected or mitigated, could result in the commercial failure of the project or losses to the lenders. It was contended that though MEP was to suggest alternative solutions for the consideration of the senior lenders and the project developer’s its role was limited to reviewing and opining rather than designing or directing the project. It was, accordingly, contended that the payment made to MEP did not fall within the ambit of ‘fee for technical services’ within the meaning of Article-13 of the DTAA between India and U.K. It was, thus, pleaded that the order passed by the CIT under section 263 may be held as without jurisdiction and unwarranted.

7. In response to the query as to whether the payment made to MEP falls within the ambit of Article-7 of DTAA as business profit or under Article- 15 as payment of personal services, the learned counsel contended that admittedly MEP was engaged in the business of providing professional services. However, since MEP did not have any permanent establishment in India, therefore, profits attributable to the services were not taxable under Article-7 of DTAA between India and U.K. It was further contended that admittedly the services provided by MEP would fall within the definition of ‘independent personal services’, but Article-15 of DTAA between India and U.K. which provides for taxation of such services, is applicable only in respect of the income derived by individual, whether in his own capacity or as member of the partnership which is a resident of contracting State in respect of professional services or independent activities of a similar character. According to the learned counsel, MEP is a company and, therefore, Article-15 of the DTAA is not attracted in this case. In reply to another query as to whether it was open to the appellant to claim that the payment to MEP was not taxable at all when the order of the Assessing Officer under section 195 directing to deduct-tax @ 5% was not challenged by the assessee, the learned counsel relied upon the decision of the Supreme Court in the case of Carborandum Co. v. CIT [1977] 108 ITR 335 [LQ/SC/1977/171 ;] at 339, 345. It was pointed out that in that case the assessee had accepted levy of tax @5%. However, when the Commissioner initiated action under section 33B of the Income-tax Act, 1922, corresponding to section 263 of the Income-tax Act, 1961, the assessee challenged such action on the ground that the sum receivable by it was not per se taxable in India. The Supreme Court held that the sum received was not taxable in India and that since 5% levy of tax not having been challenged by the assessee, the Court could not interfere with such taxation but held that the technical fee in excess of 5% was not taxable. According to the learned counsel, the ratio of the said decision of the Supreme Court squarely applies to the facts of the present case and that the assessee is well within it rights in challenging the order of the CIT under section 263 for imposing the tax @ 20% on the ground that no tax at all is chargeable without affecting the levy of 5%. It was accordingly, pleaded that the view expressed by the Ld. Accountant Member is correct in comparison to view expressed by the Ld. Judicial Member. It has also been pointed out that the finding of the Ld. Judicial Member that any order which is prejudicial to the interests of Revenue is erroneous and vice versa is contrary to the decision of the Supreme Court in the case of Malabar Industrial Co. Ltd. (supra). The learned counsel further contends that the reliance by the Ld. Judicial Member on the decision of the Supreme Court in the case of Sree Manjunathesware Packing Products & Camphor Works (supra) is misplaced as the issue in that case related to meaning of the word ‘record’ for the purpose of section 263 and the said decision has no application to the present case. It has also been contended that though the Ld Judicial Member has held that the payment to MEP is in the nature of fee for technical services so, however, no underlying reason has been given to support such finding. It was, accordingly, pleaded that the appeal of the assessee may be allowed.

8. The Ld. Departmental Representative, on the other hand, contended that MEP had provided technical services to the assessee as well as to the financial institutions and that the MEP was also responsible for suggesting corrections to any deficiency or inaccuracy in the project implemen- tations. The assessee was entitled to use the technical information given by MEP for the generation of electricity. It was, accordingly, pleaded that the order passed by the Assessing Officer in asking the assessee to deduct tax @ 5% was erroneous and prejudicial to the interests of Revenue. The Ld. Departmental Representative contended that the rate of 5% was not applicable in respect of any payment made to a non-resident. The Assessing Officer perhaps applied the rate of 5% which was applicable to payments under section 194J for rendering professional services. The Assessing Officer ignored the fact that the payee, i.e., MEP was a non-resident and the provision of section 194J was not applicable. Since the tax was to be deducted @ 20% on account of technical and consultancy services provided by MEP; the order passed by the Assessing Officer was erroneous and that both the conditions for invoking section 263 were satisfied in this case.

9. I have given my careful consideration to the rival contentions. The dispute involved in the appeal of the assessee is relating to the chargeability of tax in respect of the amount paid to MEP on the terms and the conditions of the agreement executed between the appellant along with financial institutions with MEP. Section 4 of the Income-tax Act, 1961 provides for levy of tax in respect of the total income of the previous year of every person. Section 5 of the Income-tax Act, 1961 gives the scope of total income, which is subject-matter of taxation under the Income-tax Act. Section 5(1) is applicable in respect of residents and since the MEP is a non-resident, the same is irrelevant. Section 5(2) is applicable in respect of the non-residents. Therefore, the same is reproduced hereunder for the sake of ready reference :

"5(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which-

(a)is received or is deemed to be received in India in such year by or on behalf of such person; or

(b)accrues or arises or is deemed to accrue or arise to him in India during such year.

Explanation 1.-Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.

Explanation 2.-For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India."

10. Section 9 of the Income-tax Act, 1961 provides the income deemed to accrue or arise in India. The relevant portion of the said section is reproduced hereunder:—

"9. (1) The following incomes shall be deemed to accrue or arise in India :-

******

(vii)income by way of fees for technical services payable by-

(a)the Government; or

(b)a person who is a resident, except where the fees are payable in respect of services utilised 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; or

(c)a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India :

Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.

Explanation 1.-For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.

Explanation 2.-For the purpose of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".

11. It is evident from the aforementioned provisions of the Income-tax Act, 1961 that as per the Explanation to section 9, the amount paid to MEP falls within the ambit of ‘fee for technical services’ and, accordingly, by virtue of the provisions of the Income-tax Act, 1961, the income is deemed to accrue or arise in India. However, section 90 of the Income-tax Act, 1961 provides for an exception. Section 90 is quoted hereunder :-

"90. (1) The Central Government may enter into an agreement with the Government of any country outside India-

(a)for the granting of relief in respect of income on which have been paid both income-tax under this Act and income-tax in that country, or

(b)for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or

(c)for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance, or

(d)for recovery of income-tax under this Act and under the corresponding law in force in that country, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.

(2) Where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.

Explanation.-For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company, where such foreign company has not made the prescribed arrangement for declaration and payment within India, of the dividends (including dividends on preference shares) payable out of its income in India."

A bare reading of the above section reveals that the section empowers the Central Government to enter into an agreement with the Govt. of any country outside India for specific purposes, inter alia, for avoidance of double taxation of income under the and under the corresponding law enforced in that country. In this case, the Central Government has entered into an agreement with the United Kingdom which is in [1994] 206 ITR (St.) 235. The source of the DTAA is thus section 90 of the Income-tax Act, 1961. If one were to apply the provision of the Income-tax Act, 1961, the payment to MEP would fall within the ambit of taxation as income having accrued or arisen in India under section 9(1)(vii) read with sections 4 & 5 of the Income-tax Act, 1961. However, sub-section (2) of section 90 of the Income-tax Act, 1961 provides that where the Central Government has entered into an agreement with the Govt. of any country outside India under sub-section (1) of section 90 for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent those are more beneficial to the assessee.

12. It is note worthy that sub-section (2) of section 90 provides for application of beneficial provisions of the agreement in contrast to the contrary provisions of the Income-tax Act, 1961. It has, however, to be borne in mind that in the event of there being no conflict between the provisions of the DTAA and the Income-tax Act, 1961, the effect shall have to be given to the provisions of the Income-tax Act, 1961. It is only when there is a conflict between the provisions of the agreements in contrast with the provisions of the Income-tax Act, 1961 that the beneficial treatment is to be given as per section 90(2) of the Income-tax Act, 1961. In this connection Circular of the CBDT being No. 333, dated 2-4-1982 also clarifies the position of law, which is quoted hereunder:—

"Subject: Conflict between the provisions of the Income-tax Act, 1961, and the provisions of the Double Taxation Avoidance Agreement - Clarification.

It has come to the notice of the Board that sometimes effect to the provisions of double taxation avoidance agreement is not given by the Assessing Officers when they find that the provisions of the agreement are not in conformity with the provisions of the Income-tax Act, 1961.

2. The correct legal position is that where a specific provision is made in the double taxation avoidance agreement, that provisions will prevail over the general provisions contained in the Income-tax Act, 1961. In fact the Double Taxation Avoidance Agreements which have been entered into by the Central Government under section 90 of the Income-tax Act, 1961, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the contrary have been made in the Agreement.

3. Thus, where a Double Taxation Avoidance Agreement provides for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income-tax Act. Where there is no specific provision in the agreement it is the basic law, i.e., the Income-tax Act, that will govern the taxation of income."

13. In the case of Advance Ruling P. No. 13 of 1995, In re [1997] 228 ITR 4871 (AAR), it has been held as under:—

"Whether a matter is governed by the provisions of the Income-tax Act, 1961, and also by a double taxation avoidance agreement, the provisions of the doubt taxation avoidance agreement should prevail unless the statutory provision is more beneficial to the assessee."

14. In view of the aforementioned settled law, it is necessary to consider the taxability of the payments to MEP in the light of the Double Taxation Avoidance Agreement between India and U.K. and if a provision is made for taxation of payments under the provisions of the DTAA, the same would be applicable unless the provisions of the are beneficial to the assessee. Thus, in the light of this background, I proceed to consider the taxability of the payments to MEP as per DTAA between India and U.K. and also proceed to consider the veracity or correctness of the order under section 263.

15. MEP is resident of U.K. The nature of services provided to the appellant and the financial institutions was admittedly in the nature of engineering services. MEP it is not disputed, is engaged in the business of providing such services. Article 7 of the DTAA between India and U.K. provides for assessment of income of an enterprise if it has any permanent establishment in India. It is not the case of the Revenue that MEP is having any permanent establishment in India. As such the payment made by the appellant to MEP was not taxable under Article-7 of DTAA between India and U.K. Article 15 of the DTAA between India and U.K. provides for taxation of income derived from providing independent personal services by any individual in his own capacity or in the capacity of a member of a partnership. Since the status of MEP is that of a company, Article 15 of the DTAA is inapplicable. Thus, the only area which is required to be considered is as to whether the payment falls within the ambit of Article-13 of the DTAA between India and U.K. It would be useful to reproduce relevant portion of the said Article-13 as under :—

"Royalties and fees for technical services.

1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State; but if the beneficial owner of the royalties or fee for technical services is a resident of the other Contracting State, the fee so charged shall not exceed :

(a)in the case of royalties within paragraph 3(a) of this Article, and fees for technical services within paragraphs 4(a) and (c) of this Article;

(i)during the first five years for which this Convention has effect;

(aa)15 per cent of the gross amount of such royalties or fees for technical services when the payer of the royalties or fees for technical services is the Government of the first-mentioned Contracting State or a political sub-division of that State, and

(bb)20 per cent of the gross amount of such royalties or fees for technical services in all other cases; and

(ii)during subsequent years, 15 per cent of the gross amount of such royalties or fees for technical services; and

(b)in the case of royalties within paragraph 3(b) of this Article and fees for technical services defined in paragraph 4(b) of this Article, 10 per cent of the gross amount of such royalties and fees for technical services.

3. For the purposes of this Article, the term "royalties" means:

(a) & (b)******

4. For the purposes of paragraph 2 of this Article, and subject to paragraph 5 of this Article, the term "fees for technical services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) which :

(a)are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this Article is received; or

(b)are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received; or

(c)make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design.

5. The definitions of fees for technical services in paragraph 4 of this Article shall not include amounts paid :

(a)for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property, other than property described in paragraph 3(a) of this Article;

(b)for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships, or aircraft in international traffic;

(c)for teaching in or by educational institutions;

(d)for services for the private use of the individual or individuals making the payment; or

(e)to an employee of the person making the payments or to any individual or partnership for professional services as defined in Article 15 (Independent personal services) of this Convention."

[Paragraphs 6 to 9 are not relevant and therefore not reproduced.]

16. It is not disputed that the payment to MEP does not fall within the ambit of the definition under Article-13(4)(a) or (b). It is the claim of the Revenue that the payment made to MEP falls within the ambit of Article 13(4)(c). Before proceeding further, it will be relevant to point out that the definition of ‘fee for technical services’ under Article 13 of the DTAA between India and U.K. is a departure from the definition generally adopted in various Double Taxation Avoidance Agreements with various other countries. The definition adopted in this case is in pari materia with the definition adopted in the DTAA between India and U.S.A. in 187 ITR (St.) 102]. Under the DTAA between India and U.S.A., Article 12(4) defines ‘fee for included services’ to mean payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services :

"(a)are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or

(b)make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or technical design."

It is thus observed that the definition of ‘fee for included services’ under DTAA between India and U.S.A. under Article 12(4), para (b) and the definition of ‘fee for technical services’ provided under the DTAA between India and U.K. under article 13(4), para (c) are in pari materia. In regard to the meaning of make available technical knowledge, experience, skill, know-how etc. under Article 12(4) of DTAA between India and U.S.A., it will be useful to refer to Memorandum of Understanding concerning "fee for included services" in Article-12 appended to the DTAA between India and U.S.A. which is intended to guide the tax payers and the tax authorities in interpreting Article-12. The relevant portion of the Memorandum of Understanding is reproduced hereunder:

"Paragraph 4(b) of Article 12 refers to technical or consultancy services that make available to the person acquiring the services technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design to such person. (For this purpose the person acquiring the service shall be deemed to include an agent, nominee or transferee of such person). This category is narrower than the category described in paragraph 4(a) because it excludes any person acquiring the service. Generally speaking, technology will be considered made available when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skill etc. are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly the use of a product which embodies technology shall not per se be considered to make the technology available."

The Memorandum of Understanding also contains certain examples indicating the scope of conditions in paragraph 4(b) of Article 12 of the DTAA between India and U.S.A., which are as under :

Example (3) :

Facts: A U.S. manufacturer has experience in the use of a process for manufacturing wallboard for interior walls of houses which is more durable than standard products of its type. An Indian builder wishes to produce this product for its own use. It rents a plant and contracts with the U.S. company to send experts to India to show engineers in the Indian company how to produce the extra-strong wallboard. The U.S. contractors work with the technicians in the Indian firm for a few months. Are the payments to the U.S. firm considered to be payments for "included services"

Analysis :

The payments would be fees for included services. The services are of a technical or consultancy nature; in the example, they have elements of both types of services. The services make available to the Indian company technical knowledge, skill, and processes.

Example (5) :

Facts: An Indian firm owns inventory control software for use in its chain of retail outlets throughout India. It expands its sales operation by employing a team of travelling salesmen to travel around the countryside selling the company’s wares. The company wants to modify its software to permit the salesmen to assess the company’s central computers for information on what products are available in inventory and when they can be delivered. The Indian firm hires a U.S. computer programming firm to modify its software for this purpose. Are the fees which the Indian firm pays treated as fees for included services

Analysis :

The fees are for included services. The U.S. company clearly performs a technical service for the Indian company, and it transfers to the Indian company the technical plan (i.e., the computer programme) which it has developed.

Example (6) :

Facts: An Indian vegetable oil manufacturing company wants to produce a cholesterol free oil from a plant which produces oil normally containing cholesterol. An American company has developed a process for refining the cholesterol out of the oil. The Indian company contracts with the U.S. company to modify the formulas which it uses so as to eliminate the cholesterol, and to train the employees of the Indian company in applying the new formulas. Are the fees paid by the Indian company for included services

Analysis :

The fees are for included services. The services are technical, and the technical knowledge is made available to the Indian company.

Example (7) :

Facts: The Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol-free oil and wishes to market the product world wide. It hires an American marketing consulting firm to do a computer simulation of the world market for such oil and to advise it on marketing strategies. Are the fees paid to the U.S. company for included services

Analysis :

The fees would not be for included services. The American company providing a consultancy service which involves the use of substantial technical skill and expertise. It is not, however, making available to the Indian company and technical experience, knowledge or skill, etc. nor is it transferring a technical plan or design. What is transferred to the Indian company through the service contract is commercial information. The fact that technical skills were required by the performer of the service in order to perform the commercial information service does not make the service a technical service within the meaning of paragraph 4(b).

17. On perusal of Memorandum of Understanding concerning ‘fee for included services’ in Article-12 appended to the DTAA between India and USA with the help of the examples, it becomes abundantly clear that the technology would be considered made available when the person acquiring the service is enabled to apply the technology. The mere fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skill, etc., are made available to the person purchasing the service, within the meaning of Article 12, para 4(b) of DTAA between India and U.S.A. which is in pari materia with Article 13(4)(c) of DTAA between India and U.K.

In example No. 3, the U.S.A. firm had sent experts to India to show Engineers of the Indian company how to produce the extra-strong wallboard. Since the Indian company was able to apply the technology, the payment for the services would fall within the ambit of technical knowledge, experience, skill, etc. having been made available.

In example No. 5, the U.S.A. company has modified the software for the Indian company. The services provided are purely technical services and the technical plan is transferred to the Indian company. Thus, the services provided fall within the definition of ‘fee for included services’.

In example No. 6 the U.S.A. company had trained the employees of Indian company in applying the formula for producing cholesterol-free oil. Thus the technical knowledge and skill is made available to the Indian company which falls within the definition of ‘fee for included services’.

In example No. 7, the consultancy services are involved in the use of substantial technical skill and expertise which was provided by the American company. So, however, there was no scope for transferring any technical experience, knowledge or skill or technical plan or design to the Indian company. What was transferred to the Indian company was commercial information. The mere fact that the technical skill was required by the performer of the service in order to perform the commercial information service does not make the service as ‘fee for included service’ within the meaning of Article 12, para 4(b) of DTAA between India and U.S.A.

18. A pertinent question that remains to be considered is as to whether it is permissible to derive any benefit from the explanatory memorandum in respect of the DTAA between India and USA in interpreting similar provision of DTAA between India and U.K. In this connection it is pertinent to point out that the DTAA between India and USA is dated 20- 12-1990, i.e., prior to DTAA between India and U.K. dated 11th February, 1994 in 206 ITR (St.) 235. It is well-settled principle of law that when an expression of doubtful meaning has received an authoritative interpreta-tion from any Court of law and when the Legislature adopts the same word or expression, subsequently, it must be held that the Legislature was conscious of the interpretation given by the Courts of such expression of doubtful meaning. This principle is supported by the decision of the Supreme Court in the case of Banarsi Debi v. ITO [1964] 53 ITR 100. [LQ/SC/1964/115] The Ld. Accountant Member has also referred to the decision in the case of R. (supra) and observations of Griffith, CJ. in the case of Webb (supra) in his order in support of the finding that when a particular form of legislative enactment, which has received authoritative interpretation whether by judicial decision or by a long course of practice, is adopted in framing a later statute, it is a sound rule of construction to hold that the words so adopted by the Legislature to bear the meaning which has been so put on them. Applying the above principle to the facts of this case, the meaning of ‘fee for technical services’, under Article 12(4)(b), which is in pari materia with the definition of ‘fee for technical services’ under Article 13(4)(c) of DTAA between India and U.K. having been explained by the Government of India in relation to the DTAA between India and USA and later on similar language having been used in the DTAA between India and U.K., the meaning assigned by the Government of India in regard to the provisions of DTAA between India and U.S.A. earlier must be held to have the same meaning as explained by the Government of India and agreed by the Government of U.S.A.

19. In the light of the above explanation relating to the meaning of ‘fee for technical services’ as understood by the Govt. of India and the Govt. of U.S.A., it will be relevant to examine as to whether the services rendered by the MEP fall within the ambit of the definition of ‘fee for technical services’ envisaged under Article 13(4)(c) of DTAA between India and U.K. In this connection, the scope of work of MEP is crucial for determination of the issue. As per the agreement between borrower and the financiers on the one part and the MEP on the other part, the scope of work is described as under:-

"Scope of work

Scope of work for the Technical Adviser describes the duties to be undertaken for Phase I of the work which are as follows:

Phase ITechnical appraisal of the project for Financial Institutions to be made before financial clost in accordance with the Scope of Work outlined in the Terms of Reference set out in Appendix A.

Subsequently, on appointment to undertake the Phase II works, the duties of the Technical Adviser will include but may not be limited to :

Phase IICertification of physical progress and disbursements during the construction phase, periodic site and factory visits to ensure that the developer’s project management team is adequately protecting the interests of the lenders to the Project; witnessing site performance and efficiency tests; and certifying when the Project provisional and final completion will be achieved. The Terms of Reference for Phase II shall be agreed between MEP and the Financial Institutions prior to financial close."

20. As per the terms of reference being Phase I, Appendix ‘A’ to the said agreement, it is provided as under :—

"The Independent Engineer. The independent engineer (the Engineer) will be appointed by the International Finance Corporation (IFC) in conjunction with the project developers. The Engineer will report to IFC, while contractual arrangements will be with the project developers, BPCL. Payment for services will and must be made by the project developers upon authorization of IFC.

The Engineer will review the project documentation with respect to technical feasibility and economic viability on behalf of the Asian Development Bank, Commonwealth Development Corporation, International Finance Corporation, ECGD and ICICI (India) (the "Senior Lenders"). This engineering review will encompass the proposed design, procurement, construction, start-up and testing, and operation and maintenance of the Project. The Engineer will identify risks or issues which, if not corrected or mitigated, could result in the commercial failure of the Project or losses to the lenders. In such cases, alternative solutions will be suggested for the consideration of the Senior Lenders and the project developer, BPCL. The Engineer’s role is that of reviewing and opining rather than designing or directing the Project. The Engineer’s review is limited to engineering issues and their potential effect upon commercial performance, legal and regulatory issues will not be addressed except to the extent expressly stated."

21. As per the terms of reference, the scope of work is described as under :—

"One Technical appraisal of the project for Senior Lenders to be made before financial close in accordance with the scope of work outlines below.

Two Certification of physical progress and disbursements during the construction phase periodic site and factory visits to ensure the developer’s project management team is adequately protecting the lender’s interest; witnessing site performance and efficiency tests; and certifying when project provisional and final completion is achieved."

The terms of reference also provided for preparation of the reports by the Engineer. The report is required to be related to unresolved issues and asserted risks identified by the Engineers.

22. When the scope of the work of MEP described above is considered in the light of the definition of ‘fee for technical services’ read with the explanatory memorandum relating to similar provisions under the DTAA between India and USA, there appears to be a blurred picture at the first sight. So, however, on careful consideration it is observed that there is specific assertion in the terms of reference incorporated in the agreement to the effect that the Engineers’ role is that of reviewing and opining rather than designing and directing the project. In the agreement it is provided that in the case of any risks or issues which are required to be corrected or mitigated, the Engineers would suggest alternative solutions for the consideration of the senior lender and the project developer, BPCL. If the suggestions based on technical appraisal, knowledge and skill are ultimately adopted, it might fall within the ambit of MEP having made available technical knowledge, skill, know-how, etc., to the assessee. So, however, the scope of suggestion of corrections and alternative solutions is limited and is contingent and the essence of the agreement is reviewing and opining rather than designing and directing the project and suggesting corrections is only incidental and is not the substance of the agreement. In the light of this background and taking into account the views of the Government of India in respect of similar provision under the DTAA between India and U.S.A., I am of the firm view that the scope of the work of MEP does not fall within the ambit of ‘fee for technical services’ as per the definition of article 13(4)(c) of the DTAA between India and U.K.

23. The payment made to MEP by the assessee not being a payment as ‘fee for technical services’ within the meaning of Article-13 of DTAA between India and U.K., the order passed by the A.O. in asking the assessee to deduct tax @ 5% was evidently erroneous insofar as the rate of 5% tax was applicable only in respect of residents providing professional services and not in respect of payments made to non-residents. So, however, no prejudice has been caused to the Revenue (sic) Assessing Officer insofar as such a payment was not liable to tax under the provisions of DTAA between India and U.K. The direction for deducting tax @ 5% as against tax at Nil chargeable in this case is thus a direction favourable to the Revenue rather than prejudicial to the interests of the Revenue. As held by the Supreme Court in the case of Malabar Industrial Co. Ltd. (supra), for exercise of the power under section 263 two conditions must coexist - the impugned order must be erroneous and also prejudicial to the interests of Revenue. In this case, agreeing with the Ld. Accountant Member that the order passed by the Assessing Officer was erroneous but it was not prejudicial to the interests of Revenue, I hold that the order passed by the CIT under section 263 does not meet the requisite conditions under section 263 of theinsofar as no prejudice is caused to the revenue as a result of erroneous order of the Assessing Officer. The order under section 263 thus deserves to be set aside. I, therefore, agree with the Ld. Accountant Member and as a result of this order, the order of the CIT under section 263 is liable to be set aside.

24. Before winding up, I consider it necessary to deal with another aspect of the case raised during the course of hearing of the appeal. As pointed out elsewhere in this order, the assessee had filed an application to the Assessing Officer asking for no objection certificate for remittance of 52,000 Sterling Pound to MEP without deduction of tax. The nature of services referred to in the application was admittedly fee for personal services. The Assessing Officer by an order under section 195 had authorized remittance after deduction of tax @5%. The order of the Assessing Officer was not challenged by the assessee by way of an appeal. Thus, a pertinent question that arises for determination is as to whether in these circumstances it was open to the assessee to challenge the said order of the Assessing Officer in the proceedings under section 263 on the ground that no tax was chargeable in respect of the remittances to MEP. This issue, in my view, is squarely covered by the decision of the Supreme Court in the case of Carborandum Co. (supra).

25. In this case the American company had filed the return of income with an application for refund of the entire tax deducted at source. The ITO took the view in the assessment order that 5% of the technical fee paid to the American company was earned by it in India and only that small amount was assessable to income-tax. As a result of the order of theO, the major portion of the tax deducted at source was refunded to the assessee-company. Subsequently, the CIT in exercise of his power under section 33B of the 1922 Act (corresponding to section 263 of 1961 Act) revised the order of theO and took the view that at least 75% of the technical fee earned by the assessees-company during the year had accrued or arisen in India. The American company went up in appeal to the Appellate Tribunal against the revisional order of the Commissioner. The Tribunal set aside the said order and restored that of theO, though it was of the view that even 5% of the technical fee could not be taken as income of the assessee-company taxable under the. But since the company had not gone in appeal because of the smallness of the amount of tax payable on the basis of 5%, the Tribunal was obliged to maintain the order of theO. At the instance of the CIT, a reference was made to the High Court. The Hon’ble Madras High Court upholding the stand taken on behalf of the Revenue answered the question referred to it in its favour and against the assessee-company. On appeal to the Supreme Court by the American company, it was held that the technical service fee received by the assessee-company from the Indian company during the accounting year relevant to assessment year 1957-58 did not accrue or arise in India nor could it be deemed to have accrued or arisen in India. Since 5% of the technical service fee had been brought to tax by theO and no appeal was filed against it by the assessee-company, their Lordships held that they cannot interfere with the assessment of 5% but held that the technical fee in excess of 5% was not taxable. The principle laid down by their Lordships of the Supreme Court in the case of Carborandum & Co. (supra) is squarely applicable in this case insofar as the assessee had not challenged the order of the Assessing Officer under section 195 in asking to deduct tax @ 5% from the payments to MEP. However, that would not stand in the way of the assessee claiming in the proceedings under section 263 that no tax was at all chargeable on the payments made to MEP. The only restriction upon the assessee is that the relief cannot be granted to the assessee in respect of 5% levy directed by the Assessing Officer, which has not been challenged.

26. As a result of cancellation of the order under section 263, the order passed by the Assessing Officer will get restored and the liability @ 5% shall stand. Therefore, the contention advanced on behalf of the assessee that it is permissible for them to challenge the liability of tax in respect of the remittances notwithstanding the fact that the liability as such was not challenged originally is accepted in the light of the aforementioned decision of the Supreme Court and the objection of the Revenue rejected.

27. Let the matter be placed before the regular Bench for announcing the majority view.

Per Shri B.K. Mitra, Judicial Member.-Whereas there was a difference of opinion between the members in this case the following point of difference was referred to the 3rd Member under section 255(4) of the.

"Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that income embedded in the payment of UK Pound 52,000 paid to M/s. Mott Ewbank Preece was not exigible to tax in India, or whether the Tribunal should have held that the same being covered by the scope of "fees or technical services" under the applicable Double Taxation Avoidance Agreement, the CIT was justified in holding that the order under section 195(2) passed by the Assessing Officer was indeed prejudicial to the interest of the revenue, inasmuch as it directed the assessee to deduct tax @ 5% whereas correct rate of tax should have been 20%."

2. The Hon’ble President appointed Shri M.A. Bakshi, Vice-President, Kolkata Bench, Kolkata as 3rd Member in this matter who vide order dated 23-7-2003 has concurred with the view of the Ld. Accountant Member in respect of the issue referred before him.

3. In view of the above decision taken by the Hon’ble 3rd Member concurring with the Ld. Accountant Member, we hold, by majority view, that the order passed under section 263 should be cancelled and the order passed by the Assessing Officer will get restored and the liability @ 5% shall stand. Therefore, the contention advanced on behalf of the assessee that it is permissible for them to challenge the liability of tax in respect of the remittances notwithstanding the fact that the liability as such was not challenged originally is accepted in the light of the decision of the Hon’ble Supreme Court in the case of Carborandum Co. (supra) and the objection of the revenue is therefore, rejected.

4. In the result, the appeal is allowed.