Installation, commissioning or assembling services being part of composite supply contract covered by specific article on PE of DTAA & not general article on FTS

Birla Corporation Limited Vs ACIT (ITAT Jabalpur)

Installation, commissioning or assembling services being part of composite supply contract covered by specific article on PE of DTAA and not general article on FTS.

Facts of the case:

• Birla Corporation Ltd. (taxpayer), an Indian company is engaged in the business of manufacturing and selling cement.
• During the assessment years 2010-11 and 2011-12, the taxpayer made payments to foreign vendors located in seven different countries viz. Austria, Belgium, China, Germany, Switzerland, UK and USA for import of plant, equipment and machinery. Under the said contracts, a part of the payment for plant, equipment and machinery represented payment of consideration for services rendered in India as there was no separate consideration, save and except for nominal reimbursement of actual costs and allowances of technical personnel visiting the installation site, for services rendered in India. The tax payer had duly deducted the taxes for the contracts specifically entered for installation, commission and supervision services.
• The taxpayer claimed that the income for services embedded in the payments were not chargeable to tax in India as these payments were for imports of plant, equipment and machinery. The taxpayer also claimed that as the payments were made for purchases, which did not give rise to taxability of related income in India, there was no requirement to deduct withholding tax.
• The tax officer held that the contract is a composite contract for supply of plant and machinery and also for ancillary services of installation, commission and erection of such plant and machinery and hence would fall under the category of ‘works contracts’.
• A portion of foreign remittances for supply or plant and machinery must be held to be in respect of services to be rendered in India and thus “accruing in India”. Accordingly, the taxpayer was required to deduct tax at source @ 42.23% on gross basis from all the payments.
• The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the order of the tax officer issued under section 201 r. w. section 195 of the Income-tax Act, 1961 (“Act”).

Issue