Articles 7 of the Indo-Australia DTAA vs. Section 44D on FTS – Delhi High Court Reverses Law

DIT Vs. Rio Tinto Technical Services (HC Delhi) –  The payment in the present case is for furnishing of evaluation report. The fee paid is for the said purpose. To collect and collate the information and furnish evaluation report, the assessee was required and it was necessary to undertake certain tests, mapping and studies. Drilling for tests as to evaluate is to gain information and knowledge.

The payment which is received is for furnishing of information and not ^―business^‖ income or composite income including ^―business^‖ income as held by the tribunal. The assessee may be carrying on manufacturing or trading activities but can enter into a contract to furnish technical information for a fee to a third party. Technical information which is furnished may be a result of the knowledge, experience and expertise gained by the assessee as a result of business or trading activity; or tests, mapping etc. may be required for furnishing the said information, but this is immaterial. The fee received from the third party in such cases is fee for technical services, if it satisfies and is covered by the Explanation 2 to Section 9(1)(vii). The payment made is to acquire technical information. Therefore it is ^―fee for technical services^‖. It will be immaterial whether the assessee had acquired and gained the said technical information because of business or trading activity or after conducting tests, mapping etc. The nature and character of the information furnished and for which the fee or consideration is paid is the relevant criteria for deciding whether or not Explanation 2 to Section 9(1)(vii) is applicable. In the present case, as per the clauses quoted above, the fee was paid to acquire technical and managerial information.

 At this stage, it will be appropriate to notice and decide the contention of the assessee that Explanation 2 to Section 9(1)(vii) is not applicable in view of the exclusion i.e., the expression ― fee for the technical services, but does not include consideration for any construction, assembly, mining or like project undertaken by the assessee^‖. The aforesaid exclusion states that the consideration received by an assessee for construction, assembly, mining or like project has to be excluded and is not fee for technical services. The use of the word ^―project^‖ in the expression is relevant and significant. Construction, assembly or mining projects are normally and in common parlance not regarded as services relating to fee for technical services. Explanation 2 to Section 9(1)(vii) makes and draws a distinction between income earned by way of fee for technical services, which have been defined to mean any managerial, technical or consultancy services, including provision on services of technical and other personnel, in contradistinction to income earned from manufacturing or trade activity. The legislature by the said expression has clarified and as a matter of abundant caution stated that construction, assembly or like project undertaken by the recipient should not be regarded and treated as consideration for fee for technical services. The reasoning and justification is obvious; construction, assembly or mining activities may not strictly fall within and be regarded as the manufacturing, or trading activity, when interpreted in a narrow manner. The intention of the legislature is that the narrow interpretation is not warranted. The aforesaid expression, therefore, is merely clarificatory and declaratory of what is fairly obvious and clear. It removes doubts and ensures that any debate on this score is avoided. It does not seek to curtail the scope and ambit of managerial, technical or consultancy services which are taxable as fee for technical services. Use of the word ^―project^‖ in the said expression requires and mandates that there should be construction project, assembly project or a mining project or a like project undertaken by the recipient and the consideration paid should be on the said account. It is apparent and the clauses of the agreement do not disclose that the assessee had undertaken any mining project or a construction project. There is no such finding recorded by the tribunal also.