ITO vs. Bennet Coleman & Co. Ltd (ITAT Mumbai)

(i) It is undisputed that the mailroom equipment comprised of various units and was hence a complex equipment. The bid document clearly stipulated that the units/components of the mailroom equipment would have to be installed and commissioned by trained and qualified personnel of the supplier, who shall, then provide training to the assessee’s employees, on the operation and maintenance of mailroom equipment. The price quoted included installation, commissioning and training. The mere fact, that both the contracts, i.e. for supply of the mailroom equipment and its installation, commissioning and training were entered into on the same date would not lead to an automatic conclusion that they should be read in isolation with the other. We cannot ignore the ground reality that, in fact the assessee has entered into two contracts, one for the supply and one for the services. The price for supply is separately indicated in the contract for supply and that for the services in the contract for services. The obligations under the contract for services are distinct. Further, in the contract for supply, the first contention of the AR that the services rendered by FERAG AG, by way of installation, commissioning of the mailroom equipment and the training of the assessee’s employees as inextricably and essentially linked to the sale of the mailroom equipment and hence not taxable separately as “Fees for Technical Services”, cannot be accepted (Ishikawajima-Harima Heavy Industries 288 ITR 408 (SC) followed);

(ii) The next contention of the assessee was that the consideration towards installation and commissioning of the mailroom equipment and training of the employees of the assessee does not fall within the definition of the expression “Fees for Technical Services” under Explanation 2 to Section 9(1)(vii) of the Act. This argument is based on the view that the services rendered by FERAG AG, will fall within the purview of the word “Assembly” appearing in the expression “construction, assembly or like project undertaken by the recipient”. The CIT(A) while upholding this argument of the assessee relied upon the definition of the expression “Assembly” appearing in Black’s Law Dictionary and in The New International Webster’s Students Dictionary and the Little Oxford Dictionary. The services enumerated in paras 3.2 and 3.3 of the agreement for services indicate very clearly that the scope involved, was bringing and positioning various components, properly aligning them, connecting the individual units, ensuring that vibrations and heat generation is avoided, etc. All these units and components had to be fitted together in a manner that they were properly positioned, aligned and, connected to ensure optimum functioning, in the shortest duration. This activity can certainly be called “assembly”. The definition of the word “assembly” does not appear in the Act and hence the word has to be interpreted as understood in common parlance. The dictionary meanings relied upon by the CIT(A) also go to support the above view. When a collection of units or components are aligned and positioned after being put together so as to ensure their proper operation and functioning it would certainly qualify as “assembly”. However, the services rendered by FERAG AG, towards training the employees of the assessee, can by no stretch of imagination, be said to fall within the ambit of the expression “assembly”. Consequently, insofar as the consideration paid to FERAG AG, related to installation and commissioning of the units and components of the mailroom equipment, the same will not fall within the purview of ‘Fees for Technical Services” as defined in Explanation 2 to Section 9(1)(vii) of the Act.

(iii) The services rendered by FERAG AG, towards installation and commissioning of the mailroom equipment and training are “Fees for Technical Services” as defined under the Act, the consideration paid towards these services are only taxable in Switzerland in the hands of FERAG AG, by virtue of the provisions of Article 14 of the DTAA between India and the Swiss Confederation. It is seen that though, the Treaty between India and Swiss Confederation in Article 12(4) defines “Fees for Technical Services”, as including the services rendered by FERAG AG, towards installation and commissioning and training, Article 12(5) provides that services covered under Article 14 of the Treaty will not qualify for “Fees for Technical Services”. Article 14 of the Treaty, though, overrides Article 12(4) while defining the term “Professional Services”, includes independent activities of engineers. Such independent engineering activities would not cover training given to the employees of the assessee. Though a training activity may be connected to an engineering concern, that by itself, would not constitute training, to be an engineering activity so as to fall within “professional services” under Article 14 of the Treaty.

(iv) FERAG AG, does not have a fixed base in India for performing its engineering activities and that the engineers sent from abroad stayed in India for training purposes for an aggregate period of 106 days, hence, taxable. The argument of the department, that Article 14 applies only to individuals, is misconceived in the light of the wording in the Treaty between India and Swiss Confederation that refers to “residents of a contracting state” and hence it is not restricted to individuals as was the case in the India Denmark Treaty that came up for consideration before the Mumbai ITAT, in Christiani & Nielsen (supra). Consequently, the argument of the AR that Article 14 of the Treaty applies to the services rendered by FERAG AG, and the consideration relating to installation and commissioning of units of the mailroom equipment is taxable in Switzerland, is upheld.