Consideration paid to a foreign company for operating and maintaining a power plant cannot be considered as fees for technical services

Court : Delhi bench of the Income-tax Appellate Tribunal

Citation : Rolls Royce Industrial Power Ltd. Vs. ACIT [2010-TII-139-ITAT-DEL-INTL]

Brief : Recently, the Delhi bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Rolls Royce Industrial Power Ltd. v. ACIT [2010-TII-139-ITAT-DEL-INTL] (Judgement date 5 October 2010 Assessment Years 1998-99 to 2004-05) held that consideration paid to a foreign company for performance of a works contract of operating and maintaining a power plant cannot be considered as Fees for Technical Services (FTS) both under the Income-tax Act, 1961 (the Act) as well as under India-UK tax treaty (tax treaty).

Further, the Tribunal held that the taxing of a foreign company i.e. the taxpayer in a manner which is more burdensome vis-a-vis an Indian company doing identical business in India would lead to discrimination. Accordingly the taxpayer is entitled to protection of Article 26 of the tax treaty and should not be subjected to tax on gross basis, but on net basis.
The Tribunal also held that for a correct and harmonious interpretation disallowance under section 44D of the Act would not apply wherever Article 7 of the tax treaty is being applied.

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