These appeals are filed by assessees directed against separate but identical orders passed by CIT(A), Bangalore, dt. 30th Sept., 2004. As issues arising out of these appeals are common, for sake of convenience, they are hereby heard together and disposed of by this common order. facts in brief are as follows: assessee is engaged in real estate development. It entered into agreement with M/s Site Concepts International Ltd., for development and transfer of designs and drawings in connection with real estate development. agreement stipulates following projects/scope descriptions: I. Project Scope Description Sec. 1. Work description Sec. 2 Conceptual design phase II. Design development phase III. Construction document phase IV. Compensation. agreement stipulates that entire designs and drawings will be transferred at Singapore either to assessee or its agent by M/s Site Concepts International Ltd., PO Box No. 362, Road Town, Tortola, British Virgin Islands. It also stipulates that entire work will be carried out by M/s Site Concepts International Ltd. in Singapore and no part of work will be carried out in India. assessee made payments to M/s Site Concepts International Ltd. without deducting any tax at source after obtaining certificate from chartered accountant in accordance with procedure laid down under s. 195. AO issued notice under s. 201 of Act to appellant, to show-cause as to why appellant should not be treated as assessee in default on ground that payments made to M/s Site Concepts International Ltd., were fees for technical services and hence income is chargeable to tax in India under s. 9(1)(vii) of IT Act. assessee contended that payment in question was not fee for technical services and that it was payment made for purchase of goods and thus it cannot be treated as assessee in default for non-deduction of tax. AO relying on judgment of Hon ble Supreme Court in case of Hindustan Aeronautics Ltd. vs. State of Karnataka (1984) 55 STC 314 at 322 (SC) and in case of Rainbow Colour Lab vs. State of Madhya Pradesh & Ors. (2000) 159 CTR (SC) 37: AIR 2000 SC 810, and held that dominant intention of contract in question is that of service and not supply of goods and thus payments received by non-resident company from Indian resident are "fees for technical services" and thus receipts are deemed to be income of non-resident chargeable to tax in India, in terms of s. 9(1)(vii) of Act. He held that assessee was required to deduct tax on such remittances in terms of s. 195 of IT Act, 1961 and having failed to do so, was assessee in default under s. 201(1). Aggrieved, assessee carried matter in appeal without success. Further aggrieved, assessee is in appeal before us. assessee has raised following grounds: (a) learned AO had erred in passing order under s. 201 r/w s. 201(1A) of IT Act in manner passed and learned CIT(A) has erred in confirming same. lower authorities have erred in not appreciating facts of case and law applicable thereto. (b) lower authorities have erred in regarding payments made by appellant to non-resident as constituting "fees for technical services" and consequentially holding appellant to be in default for not having deducted tax at source on payments made. (c) lower authorities have erred in concluding that payments constituted "fees for technical services" without concluding whether it constitutes managerial services or technical services. (d) lower authorities have erred in not appreciating that: (i) deployment of means in s. 9(1)(vii) would denote that definition is exhaustive and not elastic in import; (ii) s. 9(1) containing deeming fictions is to be strictly construed. (e) lower authorities have erred in not appreciating fact that payments, not satisfying any of limbs of definition of "technical services" would therefore not fall within ambit of s. 9(1)(vii) of IT Act. (f) lower authorities have erred in not appreciating fact that payments in instant case were made for development and transfer of design, and being out and out transfer on sale of such designs and drawings, payments for such sum would not constitute fees for technical services. (g) lower authorities have not appreciated fact that payments were made without deducting tax at source after obtaining certificate from chartered accountant to effect in accordance with procedure laid down under s. 195. (h) lower authorities have erred in upholding reliance placed upon case law under other enactments and of foreign Courts in sustaining conclusions. same are not relevant; cases are distinguishable as they have been rendered under different facts and under different enactments. (i) Assuming without admitting, that payments were liable for deduction of tax at source, learned CIT(A)-IV has erred in confirming applicability of provisions of s. 195A of IT Act in determining amount of tax to be deducted at source. (j) In view of above and on other grounds to be adduced at time of hearing, appellant prays: (i) order passed by AO and confirmed by CIT(A)-IV be quashed or (ii) appellant be held not liable to deduct tax at source in respect of impugned payments and interest levied be also deleted. learned counsel for assessee submitted that: term fees for technical services is defined in Explanation to s. 9(1)(vii) to mean "any consideration for rendering of managerial, technical or consultancy services and thus indicates that definition is exhaustible in nature and that there is no scope for enlargement of same, so as to include fees for other services. His contention is that for payment to be covered under fees for technical services, by s. 9(1)(vii), it should satisfy condition of being payment for consultancy, managerial or technical services. intellectual property in said designs vested with M/s Site Concepts International Ltd., and payment in instant case was made for transfer of designs by sale at Singapore and that AO acknowledges that payment was made for development and transfer of drawings and designs i.e. payment was made for transfer of title as non-resident did not retain property in drawings and design. contract was not contract of service as in case of service, supplier undertakes to perform services, which required use by supplier of special knowledge, skill and expertise, but not transfer of such knowledge, skill or expertise to other party. He distinguished sale transaction from service transaction by submitting that in case of sale, it presupposes title in goods as that of transferor, prior to same being conveyed to buyer and whereas in case of service, property always belongs to person who makes payment for services. That property in designs and drawings did not belong to assessee from beginning and payments made by appellant constitutes purchase consideration for transfer of title in drawings. He relied on following case law: (i) CIT vs. Davy Ashmore India Ltd. (1991) 190 ITR 626 (Cal), wherein it was held that payments for acquisition of drawings and designs would not constitute royalties. (ii) Munjal Showa Ltd. vs. ITO (2001) 117 TAXMAN 185 (Del), wherein it was held that payment for supply of designs and drawings would not constitute fee for technical services. (iii) India Hotels Company Ltd. vs. ITO, Mumbai B Bench in ITA No. 553/Mum/2000, order dt. 14th Dec., 2005, wherein it was held that services were only to create design and title in design, etc. has passed to assessee company and it is not payment or fees for technical services nor payment in nature of royalties and that assessee company had purchased and acquired designs and drawings. (iv) CIT vs. Klayman Porcelains Ltd. (1998) 229 ITR 735 (AP). He further argued that lower authorities have erred in holding that this is service contract by relying on decisions rendered under sales-tax laws for reason that both these enactments are different and definitions are also different. For this proposition he relied on following case law: (i) Jagatram Ahuja vs. CGT (2000) 164 CTR (SC) 1: (2000) 246 ITR 609 (SC) at p. 620 (ii) CIT vs. Bharat Earth Movers Ltd. (2004) 188 CTR (Kar) 488: (2004) 268 ITR 232 (Kar) (iii) CIT vs. Sun Engineering Works (P) Ltd. (1992) 107 CTR (SC) 209: (1992) 198 ITR 297 (SC). Alternatively, he contended that payments were made after obtaining certificate from chartered accountant in accordance with procedure laid down under s. 195 and therefore provisions of s. 201 r/w s. 195 are not attracted. He submitted that payments made to non-resident may require deduction of tax at source if any portion thereof constitutes income chargeable to tax in India and that earlier statute required assessee to seek certificate from AO for remitting amounts to non-resident without deduction of tax and that under present law, AO s certificate has been dispensed with and in its place certificate from chartered accountant was mandated to be obtained. Thus, he argues that obtaining of certificate from chartered accountant constitutes parallel regime for making payment to non-resident without deduction of tax at source or after deducting tax at particular rate. Thus, he argues that as assessee has obtained certificate from chartered accountant prior to remittance of amount, he cannot be held as assessee in default. default. He submitted that under current law, if IT Department was of opinion that certificate issued by chartered accountant does not lay down correct position of law, then procedure would be to initiate proceedings under s. 163 by treating person who made payment as agent of non-resident. He submits that collection of tax by way of TDS is only mechanism for recovery of tax or provisional payment and that when assessee on genuine, valid and bona fide belief does not make deduction of tax, by following procedure prescribed by CBDT, it cannot be held as assessee in default. He concluded his submissions by pointing out that non- resident does not have PE in India and transaction is not that of sale and that assessee had followed prescribed procedure prior to remittance and thus cannot be held as assessee in default. He prayed for relief. learned Departmental Representative, on other hand, vehemently controverted arguments of learned counsel for assessee and submitted that agreement which is extracted by AO in his order under s. 201 clearly brings out that it is works contract and payment was made for rendering of professional services. He pointed out that wording in agreement i.e. "project scope description" followed by "work description, conceptual design phase design" supports view taken by first appellate authority. He specifically pointed out to s. 2 sub-cl. (3), wherein it is stated as follows: "The specific professional service for conceptual design phase shall consist of following: (a) Preparation of one color rendered schematic landscape plan @ 1:500 scale showing hardscape and softscape design approach. (b) Presentation of two color rendered elevation/sections of initial concept." He took this Bench through three page document which is in form of letter and submitted that substance of agreement has to be seen and that this was definitely service contract. He submitted that non-resident was required to obtain specific details from assessee and had to develop plans and designs using their professional expertise and that these plans and designs are project specific and assessee specific and thus it is case of professional service as defined in s. 9(1)(vii). He relied heavily on order of AO as well as that of CIT(A) and submitted that same may be upheld. He specifically pointed out that words technical or consultancy service have very wide meaning and should be understood in manner in which businessman understands. He submitted that drawings and designs are end product of technical services in question and they are not essence of contract. He pointed out that designs have been prepared according to requirement of project, its location, size, etc. and that it is customized product and hence has essential characteristic of service contract. On issue of chartered accountant certificate, he submitted that it is not substitute to earlier requirement of no objection certificate from AO prior to remittance to non-resident. He argued that in any event, certificate from chartered accountant cannot negate AO s powers under s. 201 to demand tax where it was not deducted or short deducted. He prayed that orders of Revenue authorities be upheld. Rival contentions heard. On careful consideration of facts and circumstances of case as well as on perusal of papers on record and o n examination of case law cited by both parties, we hold as under. undisputed fact is that non-resident does not have PE in this country. agreement stipulates that entire work by non-resident will be carried out in Singapore and that no part of work will be carried out in India. non- resident had developed project specific and client specific plans and designs and document states that entire designs and drawings will be transferred at Singapore to its clients or its agent. On these facts, we are unable to persuade ourselves to agree with findings of Revenue authorities that there is no sale of said plans and designs outside country. Perusal of order of first appellate authority shows that basis on which he had came to conclusion that this is service contract and not sale and transfer of design was: (i) designs are end products of service and (ii) It is customized product. ground that this being customized product, it should be held that it is works contract, is misplaced. Hon ble Hyderabad Bench of Tribunal in case of AP State Road Transport Corpn. vs. Dy. CIT (2002) 74 TTJ (Hyd) 531 has dealt at length on matter and after relying on number of decisions of Hon ble Supreme Court has come to conclusion that even though product in question is customer specific, it cannot be held as works contract. We are convinced with arguments of learned counsel for assessee that in case of service contract, property in question always remains with service receiver and whereas in case of sale, property in goods is passed on to buyer only on transfer. In this case, it cannot be said that property in designs and drawings at conceptual and development stage belonged to assessee. contract specifically provides that designs and drawings would be transferred to assessee from non- resident in Singapore. Visakhapatnam Bench of Tribunal in case of Skoda Export Co. Ltd. vs. Dy. CIT (2003) 81 TTJ (Visakha) 633 has held as follows: "Drawings and designs and technical documents supplied by non- resident company (assessee) to Indian company being in nature of plant n d machinery, receipts thereof cannot be considered as fee for technical services and consequently SDR variations in respect of such designs and engineering charges are also not in nature of fees for technical services and are not taxable in India. For proposition that drawings and designs constitute plant we relied on decision of Hon ble Supreme Court in case of Scientific Engineering House (P) Ltd. vs. CIT (1985) 49 CTR (SC) 386: (1986) 157 ITR 86 (SC)." facts of case on hand are identical with facts of case dealt by Mumbai B Bench of Tribunal in ITA No. 553/Mum/2000, order dt. 14th Dec., 2005 in case of Indian Hotels Company Ltd. vs. ITO, wherein at para 7 it is held as follows: "A careful reading of above clauses of agreement between assessee company and M/s HBA clearly shows that fees payable to M/s HBA are neither fee paid for technical services nor are in nature of royalty as defined in various articles of DTAA between India and Singapore. As per various clauses of said agreement it is clear that M/s HBA has to handover and transfer all layout plans and interior concepts in regard to areas defined in agreement and all interior design, drawings and presentation material shall become property of assessee company. All design work submitted by M/s HBA is for use solely on this project and cannot be used as part of any other design and transfer of property in interior design, drawing, presentation material shall take place in Singapore. It is specifically provided in cl. 4.5 of agreement that all interior design, drawing and specifications shall become property of client and same shall be used for any other purpose other than that covered by this agreement by interior designer. services were only to create design and title in design etc. has passed in this case to assessee company. In these facts of case, we hold that fee payable to M/s HBA is not fee for technical services and is not in nature of royalty as per articles of DTAA between India and Singapore and therefore, assessee was not liable to deduct tax from remittances to M/s HBA (P) Ltd. assessee company has purchased and acquired interior design and drawing from M/s HBA and property therein has in fact passed to assessee company. In this view of matter, issue is decided in favour of assessee and grounds of appeal of assessee are allowed." Sec. 9(1)(vii) deals with income by way of fees for technical services and Expln. (2) defines fees for technical services as "means for consideration for rendering of any managerial, technical or consultancy services". It also provides what is not to be included within such term. When specific definition is given in Act, it is not correct for assessing authority to widen its scope and say that meaning in general parlance has to be taken while considering this term. Even otherwise, undisputed fact is that no part of work or service was done in India. agreement specifically provides that entire work will be carried out in Singapore and no part of work will be carried out in India. There is no evidence with Revenue that this covenant in agreement has been violated. On this factual position, legal aspects discussed in case of been violated. On this factual position, legal aspects discussed in case of AP Power Generation Corporation Ltd. vs. Asstt. CIT Hyd. B Bench in ITA Nos. 1057 to 1060/Hyd/2001 vide order dt. 7th March, 2006 [reported at (2007) 107 TTJ (Hyd) 685-Ed.] wherein at para 24 p. 52 it is held as follows: "The next contention is whether act of not making application under s. 195(2) to ITO does empower ITO to enforce deduction of tax from gross sums of money. This issue has been decided by jurisdictional High Court in favour of assessee in case of CIT vs. Superintending Engineer, Upper Sileu (1985) 46 CTR (AP) 238: (1985) 152 ITR 753 (AP). At p. 769 it was observed by Hon ble Court as follows: We are unable to accept contention of learned counsel for Revenue that, because assessee did not file application under s. 195(2), ITO is empowered to call upon assessee to pay tax under s. 195 in respect of entirety of gross sum. It should be borne in mind that person may be honestly under impression that no part of gross sum payable to non-resident is chargeable to tax as income under Act and hence, he does not find it necessary to make application under s. 195(2). ITO, on other hand, may be again honestly under impression that gross sum of money includes some portion chargeable under IT Act. Could it be said that, under such circumstances, person responsible for making payment could be punished or penalized by requiring him to pay tax deductible on entirety of gross sum? answer is clearly negative. We cannot accede to contention of learned counsel for Revenue that ITO is entitled to call upon electricity board to pay tax deductible under s. 195 in respect of entirety of payments made to M/s Charmillies Engineering Works Ltd. in RC 203 and to M/s Oerlikon Engineering Company in RC 205. It must be remembered that order was passed under s. 201 of Act. For purpose of determining tax in respect of which person responsible for making payment could be deemed to be in default, ITO must determine tax only on appropriate proportion of income chargeable under Act. There is no prohibition in s. 201 of Act. In fact of ITO s own acquiescence that in respect of erection charges paid to other companies, net profit could not exceed 25 per cent, it is not possible to uphold ITO s action in determining tax with reference to gross sums of money in RC 203 and RC 205. As already mentioned, power to determine appropriate amount of tax is referable to s. 201 of Act and fact that assessee did not file application under s. 195(2) for determination of such appropriate proportion is not relevant for purpose. In any event, this is only way provisions contained in s. 195 and s. 201 can be harmoniously interpreted. We, therefore hold that power of ITO under s. 201 of Act to deem person responsible for paying any sum to non-resident under s. 195 as being in default extends only to proportion of income chargeable under Act and forming part of gross sum of money . (Emphasis, italicized in print, supplied) At p. 772, in answer to question No. 2 it is stated as follows: obligation of respondent-assessee to deduct tax under s. 195 is limited only to appropriate proportion of income chargeable under Act forming part of gross sums of money paid to three non-residents above referred. Approving of this decision Hon ble Supreme Court in case of Transmission Corporation of AP Ltd. vs. CIT (1999) 155 CTR (SC) 489: (1999) 239 ITR 587 (SC) at 596 answered question No. 2 as follows: obligation of respondent-assessee to deduct tax under s. 195 is limited only to appropriate proportion of income chargeable under Act. combined reading of these two judgments clearly indicate that when there is no portion of income chargeable under Act from out of gross sums of money paid, then s. 195 is not attracted. This view is fortified by following Board s circulars: Circular No. 23, dt. 23rd July, 1969 Circular No. 786 dt. 7th Feb., 2000 In Circular No. 23, para 3 (p. 1) reads as follows: following clarifications would be found useful in deciding questions regarding applicability of provisions of s. 9 in certain specific situations: Non-resident exporter selling goods from abroad to Indian importer No liability will arise on accrual basis to non-resident on profits made to him where transactions of sale between two parties are on principal to principal basis. In all cases, real relationship between parties has to be looked into on basis of agreement existing between them but where: (a) purchases made by resident are outright on his own account. (b) transactions between resident and non-resident are made at arm s length and at prices which would be normally chargeable to other customers. (c) non-resident exercises no control over business of resident and sales are made by latter on his own account, or (d) payment to non-resident is made on delivery of documents and is not dependent in any way of sales to effected by resident. It can be inferred that transactions are on basis of principal to principal . Paras 2 and 3 (p. 2) of circular reads as follows: 2. Non-resident company selling goods from abroad to its Indian subsidiary (i) question may arise whether dealings between non- resident parent company and its Indian subsidiary can at all be regarded as on principal to principal basis since former would be in position to exercise control over affairs of latter. In such case, if transactions are actually on principal to principal basis and are at arm s length and subsidiary company functions and carries on business on its own, instead of functioning as agent of parent company, mere fact that Indian company is subsidiary of non-resident will not be considered valid ground for invoking s. 9 for assessing non-resident. Sale of plant and machinery to Indian importer on instalment basis Where transaction of sale and purchaser is on principal to principal basis and exporter and importer have no other business connection fact that exporter allows importer to pay for plant and machinery in instalments will not by itself render exporter liable to tax on ground that income is deemed to arise to him in India. Indian importer will not in such case, be treated as agent of exporter for purpose of assessment . Further, para 7 (p. 3) of same circular reads as follows: 7. Extent of profit assessable under s. 9 does not seek to bring into tax net profits of non-resident which cannot reasonably be attributed to operations carried out in India. Even if there be business connection in India, whole of profit accruing or arising from business connection is not deemed to accrue or arise in India. It is only that portion of profit which can reasonably be attributed to operations of business carried out in India, which is liable to income-tax. Para 2 of Circular No. 786 reads as follows: 2. deduction of tax at source under s. 195 would arise if payment of commission to non-resident agent is chargeable to tax in India. In this regard attention to CBDT Circular No. 23, dt. 23rd July, 1969 is drawn where taxability of Foreign Agents of Indian Exporters was considered along with certain other specific situations. It had been clarified then that where non- resident agent operates outside country no part of his income arises in India. Further, since payment is usually remitted directly abroad it cannot be held to have been received by or on behalf of agent in India. Such payments were therefore held to be not taxable in India. relevant sections namely s. 5(2) and s. 9 of IT Act, 1961 not having undergone any change in this regard, clarification in Circular No. 23 still prevails. No tax is therefore deductible under s. 195 and consequently expenditure on export commission and other related charges payable to non-resident for services rendered outside India becomes allowable expenditure. On being apprised of this position Comptroller and Auditor General have agreed to drop objection referred to above. jurisdictional High Court has made it abundantly clear that requirements for treating assessee as being in default extends only to portion of income chargeable under Act. Thus, issue is answered in favour of assessee by applying ratio of judgment of jurisdictional High Court. Thus, argument of learned counsel for assessee that at best, certain percentage of amount received towards services which is 2.63 per cent in case of main generation equipment and 2.91 per cent in case of 400 KV Gas Insulated Switchgear can only be considered as income attributable to PE and this alone can form basis for holding that person is liable in terms of s. 195 of Act is upheld ." Thus, applying propositions to facts on hand, as no work is done in India, no portion of work is taxable in India and thus s. 201 r/w s. 195 is not attracted in this case. Thus, for these reasons, we follow decision of Mumbai Bench of Tribunal in case of India Hotels Company Ltd. (supra) and judgment of Hon ble Supreme Court in case of Transmission Corpn. of AP vs. CIT (1999) 155 CTR (SC) 489: (1999) 239 ITR 587 (SC) and uphold contention of assessee that transaction in question is transaction of sale and not case of rendering technical services as contemplated under s. 9(1)(vii) of Act and even otherwise no part of service is rendered in India and thus, assessee cannot be held to be assessee in default for non-deduction of tax at source. Thus, this ground appeal of assessee is allowed. As we have allowed appeal of assessee on this ground, we do not propose to go into other contentions as it would be academic exercise. In result, appeals of assessee are allowed. *** ABISHEK DEVELOPERS v. INCOME TAX OFFICER