|Rajendra (AM), Ram Lal Negi (JM)
|9(1)(vii), Article 12
|Fees for technical services
|Dhanesh Bafna, Kanchan Kaushal
|March 11, 2016 (Date of pronouncement)
|March 14, 2016 (Date of publication)
|Click here to download the file in pdf format
|S. 9(1)(vii)/ Article 12: “Startup services”, though technical in nature, are not assessable as “fees for technical services” u/s 9(1)(vii) if they do not involve any “construction, assembly mining or like projects”. The services are also not taxable under Article 12 as they do not “make available” technical knowledge
JTPCL had invited bids for a installing a power plant in Karnataka,that the assessee had submitted bids that were accepted by JTPCL,that as per the bid letter the assessee was responsible for carrying out procuring of plant and equipment, basic engineering, review of detailed engineering and construction work at site including erection and commission of the plant, that the off shore equipment supply and related services contract was given to the assessee, that in the notes to the accounts the assessee had given details of services rendered by it, that it had split the services under three heads i.e. technical services, start up services and over all responsibility, that the scope of technical services related to conceptualisation of a detailed and complete power plant design, that it had to prescribe the specification of equipments that were necessary for a power plant, that the equipments were to be designed by the identified manufacturers as suggested by the assessee, that it had to ensure that each section of the supply would be designed, specified and manufactured with the skill and care, that it had to ensure and co-ordinate the design of each section and equipment, that under the head ‘start up services’ it had to deal with the complexities involved in executing the project, that the services under the head ‘start up services’ included making available persons original supplier to ensure smooth start up and commissioning of the plant, that the startup services included equipment, installation, operation and maintenance, training of personnel and assistance/advise on commissioning and start-up, that the overall responsibility services included incorporation of equipment as per the design under the contract, , that the total consideration payable by JTPCL was US$ 2,70,33,664 for equipment supply and US$3,02,94,536 for rendering services, that JTPCL approached the AO to issue a certificate, u/s.195(2)of the Act, to make payment to the assessee without deducting tax, that the AO concerned directed JTPCL to deduct tax at certain rates, that during the assessment proceedings the AO held that income amounting to Rs.130.96 Crores was taxable under the head FIS as per the provisions of Article 12(4)(b)of the Indo-US DTAA r.w.s.9(1)(vii),that the FAA upheld the order of the AO. This was upheld by the CIT(A). On appeal by the assessee to the Tribunal HELD allowing the appeal:
(i) We are of the opinion that technical services or the start-up services, provided by the assessee, did not include any construction, assembly mining or like projects and therefore the payment received by it would not constitute FTS as per the provisions of the Act. Here, we would like to refer to the decision of the Hon’ble Madras High Court delivered in the case of Neyveli Lignite Corporation (243ITR459).In that case the assessee was engaged in the mining of lignite. It had entered in to an agreement with a Hungarian company for acquiring steam generating plant for more efficient running of its business. The AO held that income had accrued to Hungarian company in India and hence the Indian company was liable for deduction of tax. The Hon’ble court decided the issue in favour of the assessee and held that receipts could not be brought to tax in India, that the payments made by it were not taxable under the provisions of section 9 of the Act. (Ichikawajama-Harima Heavy Industries Ltd (288 ITR 408) referred).
(ii) As regards whether the services rendered by the assessee could be termed FIS as per the provisions of Article 12 of the DTAA, it is clear that to be classified as FTS the services should enable the service receiver to carry out services by obtaining the technical knowledge/ experience/ skill possessed by the service provider. It is possible that service provider may utilise its own technical knowledge in providing the services but that in itself would not render the services being treated as making available to the service receiver. If the twin test envisaged in the judgement of De Beers India Minerals(P)Ltd. (346ITR467) is applied to the facts of the case it has to be held that perusal of the contracts, entered into by the assessee with JTPCL, reveal that the services provided by it under the contracts did not in any way make available technical knowledge and experience skill or know-how to the Indian Compnay. It had supplied the equipments to Indian company outside India, so the payments made by JTPCL to the assessee would not constitute FIS, as per Article 12 of the Treaty.