Section 9(1)(vii) - Fees for Technical Services
Whatever is payable by a resident to a non-resident by way of fees for technical services, would not always come within the purview of s. 9(1)(vii) of the Act. It must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax.
1. The assessee-company filed its return of income on 31.3.1991,declaring total income at Rs.nil
2. The Assessing Officer (AO) completed the assessment ,u/s. 143(3) of the Act,on 27.3.2001 determining the income of the assessee at Rs.1,30,96,76,526/-
3. During the assessment proceedings,the AO found that the assessee had entered into a contract with JTPCL to set up a power plant in Karnataka
4. The nature of services rendered to JTPCL included providing of engineering and designing work, providing material based on overall design, providing quotations based on specifications developed by the assessee for the power plant, supplying drawing review to enable integration of the equipment and undertaking document of designs, that the services were split up under the head technical services, start-up services and overall responsibilities
5. The assessee submitted before the that AO the overall responsibility and management of the project was carried out by the assessee from outside India, that no Permanent Establishment (PE) was created in India, that the amounts received by the assessee for undertaking overall responsibility did not amount to transfer of technology/technical knowhow to JTPCL, that no technical services/included services were provided by the assessee to JTPCL as envisaged by the Act/DTAA.
6. It was further argued that in case of supply of equipment and essential spares no part of the activities was carried out in India, that as per the terms of the contract the title of all the equipments and spares was transferred to JTPCL at the port of shipment i.e. overseas, that the payment of supply of equipments etc. was received outside India, that portion of the amount received on account of supply of equipment/ spares was not assessable to tax in India either on receipt basis or on accrual /arising basis, that no part of the activity or the receipt was deemed to accrue or arise or was received in India
7. However,the AO held that as per section 9(1)(vii) and Article -12(4)(b) of DTAA the place that was relevant for taxation purposes was the place where the services had been actually utilised. Finally,he held that services rendered by the assessee were fee for included services(FIS)as per Article 12 of the treaty
8. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA)
9. After considering the submission of the assessee and the assessment order,the FAA held that income had accrued and arisen in India to the assessee as per the amended provisions of section 9(2)of the Act
10. Aggrieved by the order of CIT(A) Assessee moved to ITAT
11. Honb. Tribunal decided the issue in favour of the Assessee
Whatever is payable by a resident to a non-resident by way of fees for technical services, thus, would not always come within the purview of s. 9(1)(vii) of the Act. It must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax. Whereas a resident would come within the purview of s. 9(1)(vii) of the Act, a non-resident would not, as services of a non-resident to a resident utilized in India may not have much relevance in determining whether the income of the non-resident accrues or arises in India. It must have a direct live link between the services rendered in India, when such a link is established, the same may again be subjected to any relief under DTAA.
If the twin test envisaged by the above judgment 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. Services mentioned in Examples 4 and 7 of the MoU are more or less similar to the services rendered by the assessee.We have also taken note of Article 12 (5)of the Treaty which stipulates that FIS would not include the amounts if same are inextricably and essentially linked to the sale of property.In the case under consideration, in our opinion, the services provided by the assessee were linked inextricably and essentially to the start-up services and sale of equipment to JTPCL. Therefore,the payment received by it cannot be treated as FIS.In our opinion,payment received by the assessee under the contract constituted business profit within the meaning of article 7 of the Tax-treaty.As per article 7(1) of the treaty business profit of an assessee can be taxed in India only if it has a PE in India.In the case under consideration the assessee is not having PE in Indiawhether fixed or otherwise.
Cases referred to