Case Law Details

Case Name : DIT Vs. SNC Lavalin International Inc (Delhi High Court)
Appeal Number :
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Courts : All High Courts (3996) Delhi High Court (1252)

Delhi High Court (the High Court) in case of DIT Vs. SNC Lavalin International Inc [2011] 332 ITR 314 (Del) held that fees received by the taxpayer for providing technical drawings and reports in relation to infrastructure projects would qualify as Fees for Included Services under India-Canada tax treaty (tax treaty). Accordingly, tax was to be deducted at 15 percent on payments made to the taxpayer.  Further, the High Court observed that the term transfer as used in Article 12(4) of the tax treaty does not refer to absolute transfer of ownership; but refers to transfer of technical drawings or designs for the use or the benefit of other party

Facts of the case

  • The taxpayer, a tax resident of Canada, was engaged in providing consultancy services for infrastructure projects. Taxpayer entered into contract with National Highway Authority of India (NHAI) for providing technical drawings and reports.
  • The scope of the service included investigation of the availability and viability of various modern technologies to ensure the most economical cost estimate, preparation of the detailed project report covering the entire design for rehabilitation and strengthening of existing carriage ways and study of environmental resettlement under the guidelines of the Government of India.
  • The taxpayer treated the fee received from NHAI as Fees for Included Services as per Article 12(4) of tax treaty on which tax is to be deducted at 15 percent.
  • The Assessing Officer (AO) held that the income received by the taxpayer would not qualify as Fees for Included Service as per Article 12 of tax treaty. Accordingly, the AO treated the income of the taxpayer as Fees for Technical Services under Section 9(1) (vii) of the Income-tax Act, 1961 (the Act) and taxed it at 20 percent as per Section 115A of the Act.

Contention of tax department :- The design provided by the taxpayer was for specific purpose only. Therefore, they could not be made available to NHAI for any other projects or purposes. Unless the development and transfer of technical plan or technical design is made available, the taxpayer would not be covered under Article 12(4) of the tax treaty.

Delhi High Court ruling

  • The High Court relied on Example 2 of Memorandum of Understanding to India-USA tax treaty and held that Article 12(4)(b) of the tax treaty considers services provided as Fees for Included Services if the taxpayer:

-either develops and transfers technical plans/designs or

-Makes available technological knowledge, experience, skill, know-how or process.

  • The term transfer as used in Article 12(4) of the tax treaty does not refer to absolute transfer of ownership; but refers to transfer of technical drawings or designs for the use or the benefit of other party.
  • Article 1 2(4)(b) of the tax treaty does not contemplate transfer of all rights or interest in such technical design or plan. Fees received from transfer of technical design or plan for the purpose of mere use would be covered under Article 12(4)(b) of the tax treaty and accordingly would be taxed at 15 percent and not at 20 percent under the Act.

Our Comments

This is an important ruling by the Delhi High Court wherein it is held that fees received by the taxpayer for providing technical drawings and reports in relation to infrastructure projects would qualify as Fees for Included Services under tax treaty and accordingly to be taxed at 15 percent and not at 20 percent under the Act..

The Calcutta Tribunal in the case of Gentex Merchants (P). Ltd. v. DDIT [2005] 94 ITD 211 (KOL.) on similar facts held that even where the technical design or plan is transferred for the purpose of mere use of such design or plan Article 1 2(4)(b) of the India-USA tax treaty4 will be attracted.

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Category : Income Tax (26778)
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Tags : high court judgments (4305)

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