(1) Whether, based on the facts and circumstances of the case, receipts by the Applicant as per the Contract for the overhauling services would be taxable as Fees for Technical Services in India under the Act? – (2) Whether the consideration receivable under the Contract would fall within the definition of Fees for included services under Article 12 of the Indo-US DTAA? Would the services make available any technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design in terms of Indo-US DTAA?
AUTHORITY FOR ADVANCE RULINGS (INCOME TAX), NEW DELHI
30th Day of May, 2012
A.A.R. No.931 of 2010
Name & address of the applicant – Solar Turbines International Company, 2200, Pacific Highway, San Diego, CS 92101.
The applicant is a company located in San Diego and incorporated under the laws of the United States of America (USA). It has a branch office in Singapore. It is a fully owned subsidiary of Solar Turbines Incorporated, USA.
2. The applicant is a manufacturer of industrial gas turbines which play an important role in the development of oil, natural gas and power generation projects. The applicant had supplied turbines to the Oil and Natural Gas Corporation (ONGC) installed at an offshore location in Mumbai. In addition to that contract for supply and installation, the applicant had also entered into a contract with ONGC for carrying out trouble shooting repair and maintenance of the turbines. It had entered into yet another contract for repair and overhaul services of the turbines. This contract for repair and overhaul services, was secured by the applicant pursuant to a tender floated by ONGC in that behalf and as per the notice of award dated 26.8.2009. The contract extends to a term of 5 years. The contract is for overhauling and repair of Solar Turbine Engines and Gear Boxes installed at its offshore location in Mumbai by ONGC. The contract itself was entered into on 14.09.2009. The contract specifies the scope of work including the technical specification of Solar Turbine Engines, the definition of overhauling, the powers and duties of the parties and the consideration payable. The applicant approached this Authority for a ruling on the question whether the amount received by it for fulfilling its obligations under the contract for overhauling and repair dated 14.09.2009, is chargeable to tax in India. In that context, the applicant raised 3 questions.
3. The Revenue sought to raise a contention that the questions now posed for ruling, were already pending before the Income-tax Authority and consequently the entertaining of the application was barred by the proviso to section 245R(2) of the Income-tax Act. On behalf of the applicant, it was explained that the questions posed now arise out of the contract dated 14.09,2009 and a question arising out of that transaction, was not pending before any authority under the Income-tax Act.
This authority accepted that submission of the applicant and allowed the application under section 245R(2) of the Act to give a ruling on the following questions:
(1) Whether, based on the facts and circumstances of the case, receipts by the Applicant as per the Contract for the overhauling services would be taxable as Fees for Technical Services in India under the Act?
(2) Whether the consideration receivable under the Contract would fall within the definition of Fees for included services under Article 12 of the Indo-US DTAA? Would the services make available any technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design in terms of Indo-US DTAA?
(3) Whether the consideration receivable by the applicant be liable to withholding taxes in India under section 195 of the Act?
4. The scope of work as given in Annexure–I to the contract includes the inspection and boroscoping periodically or as and when needed by the applicant to ascertain the health of the installed parts of the gas turbines installed. If any defect is noticed, the particular gas turbine has to be taken out from service for rectification of the defect. Those services are to be charged at solar field daily rates applicable at the time of service. Turbine taken out for service is to be transported by ONGC and delivered at Dallas Air Port, USA. From that air-port, the applicant is to remove the turbine to its site at Desoto in USA. The dismantling, stripping and inspection of the components is to be carried out by the applicant at its work site and a report of the result furnished to ONGC. Latest modifications are to be incorporated by the applicant and the details of such modifications are to be furnished by the applicant to ONGC. After completion of the overhauling work, the turbine is to be preserved, packed in metallic container supplied by ONGC. The obligation to bring back the overhauled turbine from Desoto itself is on ONGC. Thus, according to the applicant, the only work done by it under the rate contract is the transport of the machinery from Dallas to Desoto, its overhaul and packing. It may be noted that the first element of inspecting and boroscoping the turbines is to be done at site in Mumbai by the experts of the applicant. In terms of the contract, the applicant has the obligation to furnish detailed drawings and data to ONGC and the agreement provides that it was granting the right to use the intellectual property by way of royalty free non-exclusive license to use the technical information that is specifically identified and purchased as a part of the order for ONGC’s internal business purposes including the right to share such technical information with ONGC’s contractors and their sub-contractors for the same purpose of providing services to the corporation itself based on execution of confidentiality agreements by the said contractors and the sub-contractors. In other words, ONGC could use the technical information for its turbines, but could not allow it to be used for the benefit of anyone else.
5. According to the applicant, the applicant has no business connection in India. It has also no Permanent Establishment. Hence, the payment received by it under the agreement in question cannot be taxed in India as its business income. The applicant submits that the income was taxable under section 9(1) of the Income-tax Act as fees for technical services. The applicant has stated
“In the instant case, the activity of overhauling would fall within the category of technical services. Accordingly, the consideration for overhauling would fall within the definition of fees for technical services. Though the applicant does not have a business connection in India, by virtue of the last explanation to sub-section (1) of section 9, the receipts for overhauling would be deemed to accrue or arise in India and taxable as fees for technical services under clause (vii) of sub-section (1) of section 9”
But according to the applicant, since it is entitled to claim the benefit of the Double Taxation Avoidance Convention (DTAC) between India and the United States, it is entitled to rely on Article 12 of the DTAC to contend that the receipt for services rendered by it under the agreement, is not taxable in India as fees for included services since the applicant is not making available any technical knowledge, experience, skill, know-how or processes or of the development and transfer of a technical plan or technical design. Understood in the context of the Memorandum of Understanding attached to the DTAC between the two countries, the test of making available would not be satisfied and consequently, the amount received by the applicant would not be taxable in India. It is emphasized on behalf of the applicant that it was only attending to overhauling of the turbines in its work place in Desoto in USA, after the turbine is delivered at Dallas, USA. After overhaul, the delivery is taken by ONGC itself at the work place of the applicant in Desoto. Consequently, no part of the work is done by the applicant in India.
6. On behalf of the Revenue, it is submitted that an attempt has been made to split up the contract for supply, installation, commissioning, trouble shooting and maintenance of the turbines artificially. Such an attempt should be discountenced. It was a part of the package. The applicant has the obligation not only to install and successfully get commissioned the plant, but also trouble shooting and maintenance and this was part of the integrated activity. The applicant has offered its income from the installation contract and trouble shooting, repair and maintenance contract for taxation under section 44BB and as FTS under the Act, even though the third component, that is, overhauling and repair, had not been offered for taxation. Inspection provided for in the present agreement, clearly invited taxation in this country. Since the applicant has to carry out inspection periodically, the applicant remains in constant touch with the position of the machines, their technical capability with regard to their performance at the specified level and then suggest and carry out the overhauling when a defect is noticed. It cannot be said that there is no connection between the overhauling services to be carried out and the contract for the supply, installation and commissioning. In view of the applicant making available the drawings and data in terms of clause 38 in the agreement, it has made available the technical specifications and engineering designed data to ONGC along with the overhauled machinery and has thus made available technical services to ONGC satisfying the requirement for taxability under Article 12 of the DTAC between India and USA. In terms of paragraph 2 of Article 12, fees for included services can be taxed in India where they arise, subject to the limitation contained in that paragraph. Under paragraph 7, fees for included services shall be deemed to arise in India, where the payer ONGC is resident. Therefore, the fees for included services is taxable in India under Article 12 of the DTAC.
7. Learned counsel for the applicant submitted that the applicant has sold 27 turbines to ONGC in the year 2004 and the present contract in 2009 based on a separate tender took in only 22 turbines and that this was an independent transaction and in no way connected with the original sale of the turbines. It is true that what is entered into is a contract for repair and services of the equipments earlier sold by the applicant. From that, it cannot be inferred that the present contract is a part of the original contract of supply, installation and commissioning. In the circumstances, the contract dated 14.9.2009 has be treated as a contract independent of the original supply of the equipment.
8. It is seen that but for the element relating to inspecting and boroscoping of the equipment in India, all other activities take place in the Unites States of America. The contract is executed in India and the payment has to be made through an irrevocable letter of credit. The entire work of overhauling is done in USA on delivery of the machinery in USA by ONGC. Thus, a major part of the work is done in USA. The question in the context of paragraph 4 read with paragraph 2 of Article 12 of the DTAC is whether services rendered by the applicant which are technical services even on its own showing, is made available to ONGC so as to qualify as included services within the meaning of Article 12. Normally, a contract for overhauling a turbine which has been supplied to a consumer for its use, cannot involve making available of any technical knowledge, experience, skill, know-how or process which would enable the receiver of the services capable of using that knowledge or design. When machinery is overhauled and given back to the owner so as to resume its business, it cannot be said to involve making available any knowledge or information within the meaning of paragraph 4 of Article 12 of the DTAC in question. The representative for the Revenue rightly relied upon clause 38 of the agreement which provides for making available of engineering designs, data and specifications (technical information) to ONGC for its exclusive use. No doubt clause 38 asserts that the applicant was granting ONGC a royalty free, non-exclusive license to use the technical information solely for the use of ONGC. Admittedly the applicant has the intellectual property right over the engineering, design, data and specifications as asserted in that clause itself. When that intellectual right is licensed to ONGC for its use, the payment therefor, would be royalty in terms of the Act and in terms of Article 12 of the DTAC. Learned counsel for the applicant submits that this transfer, apart from being royalty free, only related to the replaced parts or upgradation of the machinery as contemplated by the agreement and this would form only a miniscule part of the transaction value and hence there is no occasion for going behind the assertion in clause 38 that it was royalty free, non-exclusive license.
9. An assertion in the agreement that the non-exclusive license was being granted royalty free, cannot estop the revenue from contending that a part of the transaction value must be ascribed to the grant of that license especially in the context of the entitlement of the revenue to tax the transaction by recourse to paragraph 2 of Article 12 of the DTAC at least as regards that part covered by inspection and boroscoping prior to dismantling of the turbines.
10. I find force in this submission of the Revenue. On a construction of the contract in question, I am satisfied that a portion of the consideration must be assigned to the inspection and the boroscoping activity that takes place in India. This would be is fees for technical services under the Act. But, the test of making available technical knowledge in terms of paragraph 4 of Article 12 of the DTAC cannot be said to be satisfied. Similarly, a part of the amount has to be ascribed to the modifications incorporated by the applicant in respect of which it grants a non-exclusive license to ONGC for its own use directly or through its contractors. This is clearly to enable the ONGC to comprehend the working of the replaced parts or new technologies introduced while overhauling. This would be fees for included services under paragraph 4(a) read with paragraph 3 of Article 12 of the DTAC. This could also be said to be making available technical knowledge or information to ONGC which ONGC can use on its own for its benefit. A part of the payment ascribed to this part of the activity, would be liable to be taxed in India in terms of paragraph 2 of Article 12 read with paragraphs 3 and 4 thereof. If so, on Question No.2 the ruling has to be that those parts of the receipts attributable to inspection and boroscoping activity carried on at the site in Mumbai though arise in India are not taxable as included services under Article 12 of the DTAC, but if the applicant is found to have a permanent establishment in India, taxable as its business income, but that part of the receipts attributable to the services rendered in modifications and replacement of parts covered by engineering, designs, data and specifications delivered to ONGC in terms of clause 38 of the contract, are taxable as included services in India under Article 12 of the DTAC between India and USA as provided for therein. On Question No.1 the ruling has to be that the payments are not taxable under the Income-tax Act, but only under the DTAC between India and USA as indicated in the answer to Question No.1. On Question No.3, it has to be ruled that on that part of the apportioned payment, tax has to be withheld under section 195 of the Act.
Accordingly, the ruling is pronounced on this the 30th day of May, 2012.