The ITAT held that the payments for services rendered with regard to reassembling and recommissioning of machinery in India under the Indian Tax Laws (ITL) and the India-Italy Double Taxation Avoidance Agreement (DTAA), would be excluded from fees for technical services (FTS) under the DTAA since the same were in the nature of business profits. However, in the absence of a permanent establishment (PE) in India, it would not be taxable in India. Thus, the Taxpayer is under no obligation to deduct tax at source on such payments.
Background and Facts
The Taxpayer, an Indian company, is engaged in the business of viscose filament yarn, carbon black, branded garments, fertilizers, textiles and insulators. It entered into an agreement with Gualchierani Textiles Automation Spa (GTA), a company and a tax resident of Italy that carried on business as a manufacturer and intervention service provider for textile automation and baling presses.
GTA had supplied and installed certain machinery in South Africa which was required to be reassembled and recommissioned at the Taxpayer’s factory premises in India. The Taxpayer entered into an agreement with GTA to deploy its technicians i.e., skilled engineers, for reassembling and commissioning of the said machinery in India. It was agreed as under:
- · Technicians would supervise the erection and commissioning of machinery in India. They would give technical advice in connection with the erection.
- · The Taxpayer agreed to pay consideration to the technicians which included software/electronic equipments cost, mechanic engineer’s cost, per day travel cost of these technicians and reimbursement of out-of-pocket expenses as per receipt.
- · Charges for lifting facilities, necessary equipment and tools, as well as the local workers, would be borne by the Taxpayer.
Further technicians did not erect the machines and it was done by local workers in India.
The Taxpayer made an application to the Tax Authority under the ITL to remit the consideration payable without any withholding of tax since the payments were not taxable in India. The Taxpayer was of the view that the payments were not taxable in India as they fall under the exclusion clause of FTS provided for ‘construction, assembly, mining or like project’ under the ITL. Furthermore, the payments were not taxable as Independent Personnel Services (IPS) under Article 15 of the DTAA since the prescribed time threshold of 183 days was not met.
The Tax Authority, however, took the view that the payments are in the nature of providing technical services and, hence, taxable in India as FTS under the ITL. It does not fall under the exclusion clause of FTS under the ITL. Furthermore, Article 15 of the DTAA, relating to IPS, does not apply since these are payments made to a company.
Aggrieved, the Taxpayer appealed before the first appellate authority which upheld the Tax Authority’s order. Against the above order, the Taxpayer preferred an appeal before the ITAT.
The payments were not in the nature of FTS under the ITL as the payments were covered in the exclusion clause of FTS provided for ‘construction, assembly, mining or like project’. Reliance was placed by the Taxpayer on the Hyderabad ITAT decision in the case of National Mineral Development Corporation [42 ITD 570].
Article 15 of the DTAA also applies to artificial person like a company. Support was drawn from the Mumbai ITAT decision in the case of Maharashtra State Electricity Board [90 ITD 793]. However, since the time threshold of 183 days was not met, the payments are not taxable as IPS under the DTAA.
The activities of GTA were mainly supervisory in nature but since these activities did not exceed the time threshold of six months prescribed for constituting a supervisory PE under Article 5 of the DTAA, the payments would not be taxable in India.
Tax Authority’s contentions
The activities carried on by the Taxpayer would not come under the purview of the exclusions specified for FTS in the ITL. The Taxpayer was merely supervising the activities and did not carry out any project. A project would be constituted if a series of activities is undertaken which, by itself, completes a desired task.
Once the payments are considered as FTS, it is not possible to consider them as business profits under the ITL as well as the DTAA.
Article 15 of the DTAA, relating to IPS, applies only to individuals. It would not apply to technicians who came to India on behalf of GTA which was a company. The expression ‘he’ used in Article 15 suggests that such an Article would apply only to individuals and not to companies.
Under the ITL
In the case of National Mineral Development Corporation (supra), the Hyderabad ITAT held that, in order to come under the exclusion clause of FTS under the ITL, the non-resident should have entered into a contract for the construction, assembly or mining.
The technicians of GTA were in India only for supervising the erection of machines and giving advice on reassembling, erecting and commissioning of machinery. They did not erect the machine which was done by local workers.
The payments in question, thus, cannot be said to be payments for assembly of machines and, therefore, cannot fall under the exclusion clause of FTS provided for assembly project etc.
Under the DTAA
The definition of FTS under Article 13 of the DTAA includes a payment in consideration for the services of a managerial, technical or consultancy nature. The nature of services rendered by GTA was technical, being supervisory in nature. However, Article 13 excludes payments for service connected to a PE or a fixed base in India under Article 5 of the DTAA.
Reliance was also placed on the ruling of the Authority for Advance Rulings (AAR) in the case of Horizontal Drilling International [94 Taxman 142] wherein it was observed that supervisory PE rule and FTS definition of the DTAA must be read harmoniously. Accordingly, payments made in consideration for supervision of a construction or installation project must be excluded from the purview of FTS definition of the DTAA.
GTA, by virtue of its technicians present in India for supervisory activities, could constitute a supervisory PE under Article 5 of the DTAA. However, since the technicians’ stay does not exceed the prescribed time threshold of 6 months, it does not constitute a PE in India under the DTAA.
Therefore, the amount in question is not chargeable to tax in India in the hands of GTA. Thus, there was no obligation on the Taxpayer’s part to deduct tax at source before making payment to GTA.
Our View:- This ruling addresses the interpretation of the exclusion clause of FTS definition contained in the ITL and clarifies that the consideration should be for construction, assembly or mining project for the exclusion to apply and services rendered in relation to such projects are not covered by the exclusion. This ruling also follows a tax treaty interpretation given by the AAR in an earlier ruling while dealing with taxability of activities that could potentially be covered by more than one Article of DTAA.
Aditya Birla Nuvo Ltd. [ITA Nos. 7674/75, 7526/27/Mum/ 2007]
Mumbai Income Tax Appellate Tribunal (ITAT)