ITO vs. Emami Paper Mills Ltd (ITAT Kolkata)

DATE: January 4, 2017 (Date of pronouncement)
DATE: January 14, 2017 (Date of publication)
AY: 2012-13
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S. 9(1)(vii)/ Article 12: There is a difference between a 'contract of work' and a ‘contract of service’. In a 'contract of work', the activity is predominantly physical while in a 'contract of service', the dominant feature of the activity is intellectual. Fees paid with respect to a ‘contract of work’ does not constitute "fees for technical services" and consequently the assessee is not liable to deduct TDS u/s 195

The assessee remitted some amount to a non-resident company of Poland without deducting taxes. A show cause notice u/s 201 of the Income Tax Act, 1961 was issued to the deductor. In response, the deductor company submitted written explanations and copies of different documents in support of its claim. The deductor company had entered into an agreement / contract dated 04th March 2011 with a company namely POL-INOWEX SA of Poland for dismantling and sea-worthy packing of paper mill machinery, and stuffing of all items into containers and loading the containers on trucks which was acquired by the deductor company from HolmensBruk AB, a company from Sweden i.e. the said site was in Sweden. The payment was made to POL-INOWEX SA of Poland, without deducting any withholding taxes. The Assessing officer held that the payments made to the non-residents for dismantling and sea worthy packing of paper mill machinery are payments made for “fees for technical services” and is taxable under the Income Tax Act 1961, in view of the specific provisions of section 5(2) (b) read with section 9(1) (vii) (c) of the Income Tax Act 1961, as well as the provisions laid down under Article 13-4 of the DTAA between India and Poland. This way, the Assessing Officer computed the tax liability on Rs.1,17,19,820/- @ of 22.5% plus interest U/s 201(1A) at Rs. 29,53,395/-. This was reversed by the CIT(A). On appeal by the department to the Tribunal HELD dismissing the appeal:

(i) The assessee had an agreement with M/s POL-INOWEX SA of Poland (POL) for dismantling of the plant and machinery. As per this agreement, the work executed by M/s POL-INOWEX do not require and technical and skill. This agreement is part and parcel of purchase of plant and machinery and it is proved from the various clauses of the said agreement that the payment was not for technical services. The Scope of work mentioned in the agreement clearly says that it is for ‘Dismantling of paper mill machinery’ which does not require any technical knowledge and specific skill.

(ii) Explanation 2 of Section 9(1)(vii) of the Act provides that “fees for technical services” 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”. The term ‘like project’ includes dismantling i.e. ‘like projects’ mean dismantling also. He has also pointed out that the assembly means dismantling also.

(iii) There is a difference between ‘contract of work’ and ‘contract of service’. In the case of assessee under consideration the agreement is for ‘contract of work’ which does not require any technical knowledge and specific skill. If the assessee hires a person outside India does not mean that he is paying fee for technical services. The assessee has hired the persons from outside India just to dismantle the machinery, which does not require any technical expertise and special skill.

(iv) There is a difference between ‘Contract of work and ‘Contract of service’. The two words convey different ideas. In the ‘Contract of work’ the activity is predominantly physical; it is tangible. In the activity referred as ‘Contract of service’, the dominant feature of the activity is intellectual, or at least, mental. Certainly, ‘Contract of work’ also involves intellectual exercise to some extent. Even a gardener has to bestow sufficient care in doing his job; so is the case with a mason, carpenter or a builder. But the physical (tangible) aspect is more dominant than the intellectual aspect. In contrast, in the case of rendering any kind of ‘service’, intellectual aspect plays the dominant role. In the case under consideration, the scope of work mentioned in the agreement clearly explains that it is ‘contract of work’ to dismantle the machinery, therefore, it is not a ‘contract of service’ hence payment by the assessee is not for technical services, therefore, the assessee company is not liable to deduct TDS.

(v) Considering the factual position and precedents, we are of the view that dismantling of machinery does not require any technical services, therefore, the present case does not fall in the ambit of fees for technical services and the assessee company does not require to deduct TDS.

Cases referred:

Andrew Yule & Co. Ltd. 207 ITR 899 (CAL), Gujarat Pipavav Port Ltd., 67 370 (Mumbai Trib), Bhel-GE-Gas Turbine Servicing (P) Ltd., 24 25(Hyd)

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