Case Law Details
IN THE ITAT MUMBAI BENCH ‘L’
Deputy Commissioner of Income-tax
Versus
Dodsal (P.) Ltd.
IT Appeal No. 2624 (Mum.) of 2006
[Assessment years 2002-03]
August, 29, 2012
ORDER
P.M. Jagtap, Accountant Member
This appeal is preferred by the Revenue against the order of learned CIT(Appeals), Central-I, Mumbai dated 13-02-2006.
2. In ground No.1 raised in this appeal as well as the additional ground filed during the course of appellate proceedings, the Revenue has challenged the action of the learned CIT(Appeals) in deleting the dis allowance of Rs. 2,69,42,412/- made by the AO u/s 40(a)(i) holding that the installation charges paid by the assessee to M/s Mesto Automation SCADA Solutions Ltd. was not chargeable to tax in India and the assessee, therefore, was not liable to deduct tax at source from the said payment.
3. The assessee in the present case is a company which is engaged in the business of engineering and general contracting. The return of income for the year under consideration was originally filed by the assessee on 31st Oct., 2002 declaring total income of Rs. 14,87,60,610/-. Thereafter the revised return was filed by the assessee on 28-11-2003 declaring total income of Rs. 4,65,68,474/-. In the original return, the assessee had disallowed an amount of Rs. 2,69,42,412/- paid to M/s Mesto Automation SCADA Solutions Ltd. u/s 40(a)(i) of the Act on the basis that no tax at source had been deducted from the said amount. In the revised return, no such disallowance, however, was made by the assessee on the ground that the said amount was related to installation charges in relation to plant and machinery supplied by M/s Mesto Automation SCADA Solutions Ltd. and the said amount not being chargeable to tax in India in the hands of the said party as per Explanation 2 to section 9(1)(vii), it was not liable to deduct tax at source from the said amount. This claim made by the assessee in the revised return was not found acceptable by the AO. According to him, there were two separate contracts for the supply of equipments and for the installation and commissioning work which by itself made it clear that the installation and commissioning work was different from the supply of plant. He held that installation and commissioning work thus was not inextricably linked to the supply of plant and the payment made by the assessee to M/s Mesto Automation SCADA Solutions Ltd. on account of installation and commissioning charges was not covered by Explanation 2 to section 9(1)(vii). He also observed in this context that the contract for supply of plant did not bind M/s Mesto Automation SCADA Solutions Ltd. to provide the services in relation to installation and commissioning of the said plant. He, therefore, held that the assessee was liable to deduct tax at source from the payment of installation and commissioning charges made to M/s Mesto Automation SCADA Solutions Ltd. and since the assessee had failed to comply with the said requirement, the amount of installation and commissioning charges was disallowed by the AO u/s 40(a)(i).
4. The dis allowance made by the AO u/s 40(a)(i) on account of installation and commissioning charges paid to M/s Mesto Automation SCADA Solutions Ltd. was challenged by the assessee in an appeal filed before the learned CIT (Appeals). During the course of appellate proceedings before the learned CIT(Appeals), the nature and scope of contracts made with M/s Mesto Automation SCADA Solutions Ltd. was explained on behalf of the assessee. It was submitted that the assessee company had entered into contract for purchase, installation and commissioning of SCADA system and application computer programs in object code / binary format for CCKPL Project. It was submitted that both the contracts/agreements had arisen out of only one letter of intent no. DOD-341/CCKPL-81/99-2000 dated 15-03-2000 issued by the appellant company and one letter of offer no. 495-990720-F-O dated 20-07-1999 issued by M/s Mesto Automation SCADA Solutions Ltd. It was submitted that pursuant to above contracts, the assessee company had paid an amount of Rs. 2,69,42,412/- (equivalent to US$ 558,050) on account of invoices raised by the supplier M/s Mesto Automation SCADA Solutions Ltd. towards work order for installation and commissioning of SCADA systems for CCKPL Project. It was submitted that the aforesaid amount was disallowed by the assessee company in the original return of income filed with the department, under an assumption that the payment made to M/s Mesto Automation SCADA Solutions Ltd., Canada was covered by the provisions of section 40(a)(i). It was also submitted that pursuant to reconsideration of Work Order between the assessee company and M/s Mesto Automation SCADA Solutions Ltd., the assessee company had filed a revised return of income claiming the aforesaid amount as allowable as the same is covered u/s 9(1)(vii) of the I.T. Act and no withholding tax at source u/s 195(1) of the I.T. Act was required to be deducted.
5. After explaining the above facts, a reference was made on behalf of the assessee company to the provisions of Explanation 2 to section 9(1)(vii) and detailed submission was made on behalf of the assessee in support of its case that the payment made on account of installation and commissioning charges to M/s Mesto Automation SCADA Solutions Ltd. was covered in the exception provided in Explanation 2. It was submitted in this regard that the income of recipient (M/s Mesto Automation SCADA Solutions Ltd.) was by way of two contracts which had arisen out of common letter of intent and letter of offer. The first contract was by way of sale of SCADA System and the second one was by way of installation, application and commissioning of SCADA system. It was contended that the second agreement for installation, application and commissioning of SCADA system thus was in nature, inseparable and supplementary to the sale of SCADA System. Although the agreement for purchase and installation of the SCADA system was executed separately under the common letter of intent and offer, it could not be denied that the same was inextricably linked to purchase of SCADA systems. It was further submitted that the SCADA system is in itself a complex object code/binary format, which can be installed and commissioned by the professional support of M/s Mesto Automation SCADA Solutions Ltd. The purchase consideration charged by M/s Mesto Automation SCADA Solutions Ltd. is in itself takes into account the purchase and installation cost of the system. Merely because the two components of purchase consideration, viz purchase cost and installation cost are executed by different contracts/agreements, the nature of transaction of purchase cannot be changed or denied. Hence, one cannot be read in isolation from the other. It was contended that the payment towards installation, application and commissioning of SCADA systems thus was part and parcel of the purchase consideration and the same could not be severed and treated as income of the non-resident company (M/s Mesto Automation SCADA Solutions Ltd. Canada) for the services rendered. It was contended that there was thus no income that had deemed to accrue or arisen in India and no withholding tax was required to be deducted u/s 195(1).
6. In addition to the above submissions made in support of its case that the amount of installation and commissioning charges paid to M/s Mesto Automation SCADA Solutions Ltd. was not chargeable to tax in India as per Explanation 2 to section 9(1)(vii), reliance was also placed by the assessee on Article 12(5)(a) of the relevant DTAA between India and Canada wherein it was provided that notwithstanding article 12(a), fees for included services does not include amount paid for services that are ancillary and subsidiary, as well as inextricably and essentially linked to the property. It was contended that the amount paid by the assessee company to M/s Mesto Automation SCADA Solutions Ltd. towards installation and commissioning of SCADA system at CCKPL project, which was supplementary to purchase of SCADA system, that had not accrued or arisen in India in the hands of recipient and the assessee was not liable to deduct tax at source from the said payment. It was contended that the dis allowance made by the AO by invoking the provisions of section 40(a)(i) thus was not sustainable and the same be directed to be deleted.
7. The learned CIT(Appeals) found merit in the submissions made on behalf of the assessee on this issue for the following reasons given in paragraph No. 2.3, 2.4 and 2.5 of his impugned order :
“2.3 I have considered the reasoning of the AO as well as submission of the appellant as made before me. The appellant placed purchase order for supply of SCADA system for petronet at CCKPL Project. Also placed second order for installation, application and commissioning of SCADA system of Petronet at CCKPL project. Appellant further submitted that both contracts arise out of one letter of intent no. DOD-341/CCKPL-81/99-2000 dated 15.3.2000 issued by appellant and one letter of offer no. 495-990720-F-0 dated 20.7.1999 issued by M/s Mesto Automation SCADA Solutions Ltd. Therefore the appellant contends that the sums received/receivable by the recipients M/s Mesto Automation SCADA Solutions Ltd. is not chargeable to tax under provision of section 9(1)(vii) of I.T. Act as the income of recipient through two contracts which had arisen out of common letter of intent and letter of offer. The first by way of sale of equipment (SCADA system) and the second one was by way of intallation application and commissioning of SCADA system. The second contract is supplementary to the first one and both are inseperable and inextricably linked with sale-purchase of SCADA system. Appellant further points out that the SCADA system as purchased by appellant is itself a complex system, which requires its installation and commissioning by professional support of the company which had supplied to it. Therefore, the payments as made is towards purchase of equipment and its installation etc. are part and parcel of purchase consideration of equipment so purchased by appellant and as such there is no applicability of provision of section 195 of I.T. Act. Appellant refers to Explanation 2 to section 9(1)(vii) and Explanation B to section 40(a) and such installation, commissioning, etc are beyond the purview of fee for technical services. Appellant also has drawn attention to Article 12(5)(a) of DTAA between India and Canada under which installation and commissioning of an equipment so purchased would not attract within the ambit of definition of fee for technical services or fees for included services.
2.4 The appellant in its support has relied on the judgement of two High Court cases namely,
(i) Orissa Sysnthetic Ltd. v. ITO 203 ITR 34 (Orisa)
(ii) CIT v. Sundwiger EMFG & Co. 262 ITR 110 (AP).
The appellant had cited example (8) in MOU attached to DTAA, which clearly mentions that the installation assistance and initial training are ancillary and subsidiary to the sale of computer and they are inextricably and essentially linked to the sale and without these facilities the computer would be of little help to the purchaser, hence the payments made for installation etc are not fees for included services. Similarly example 9 for which attention drawn by appellant in its submission is of similar nature where the initial installation, inspection, training services during warranty period are ancillary and subsidiary as well as inextricably linked to sale of X-Ray machines.
2.5 Considering the explanation as submitted by appellant, I am of considered view that appellant had made out its case that the two contracts entered upon by appellant one for purchase of equipment and other for installation etc of equipment forms part of one transaction relating to purchase of SCADA System, which in fact is part and parcel of one common intent and offer between parties and is in respect of sale-purchase of SCADA system. This sale-purchase transaction is not subject to provision of section 195 of I.T. Act and also not coming within the ambit of section 9(1)(vii) of I.T. Act. The AO on the facts and circumstances in appellant’s case is not justified to hold that the supply of equipment and its installation are primarily not inextricably linked. Under the provision of DTAA between India and Canada, as discussed above, the appellant’s case on facts is clearly covered under the exclusion provided therein as pointed out by appellant in its submission. Therefore after considering the case laws as relied upon and the provision of DTAA as referred to by appellant in its submission, I am of the considered view that the provisions of section 40(a) of I.T. Act are not applicable and AO is not justified ins its action.”
For the reasons given above, the learned CIT(Appeals) deleted the dis allowance made by the AO u/s 40(a)(i) on account of installation and commissioning charges of Rs. 2,69,42,412/- made by the assessee to M/s Mesto Automation SCADA Solutions Ltd.
8. The learned DR submitted that there were two different agreements entered into by the assessee with M/s Mesto Automation SCADA Solutions Ltd., one for supply of system and other for installation and commissioning. She took us through the copies of the said two agreements placed at page No. 16 and 27 of the paper book to point out that the value of system was 7,86,811 U.S. Dollars whereas the value of installation, commissioning etc. was 8,94,380 U.S. Dollars. She contended that going by these values as well as scope of services rendered by M/s Mesto Automation SCADA Solutions Ltd. to the assessee company in terms of the separate agreement, there were two separate transactions of supply of system and for installation and commissioning and the payment made for installation and commissioning was not covered in the exception provided either in Explanation 2 to section 9(1)(vii) or in article 12(5)(a) of the India Canada Tax Treaty. In support of this contention, she relied, inter alia, on the decisions of Bangalore Bench of ITAT in the case of Jindal Tractebal Power Co. Ltd. v. Dy. CIT [2007] 106 ITD 227, Delhi Bench of ITAT in the case of Hotel Scopevista Ltd. v. Asstt. CIT [2007] 18 SOT 183 and the decision of Authority for Advance Rulings in the case of Airports Authority of India, In re [2010] 323 ITR 211/190 Taxman 209 (AAR-N. Delhi).
9. The learned counsel for the assessee, on the other hand, submitted that although there were two separate agreements for purchase of SCADA system and for installation, commissioning etc. of the said system, the same were entered into simultaneously on the same date i.e. 29-04-2000. She took us through the agreement for installation, commissioning etc. of SCADA system placed in the paper book to point out the cross reference made in the said agreement to the purchase of SCADA system by the assessee from M/s Mesto Automation SCADA Solutions Ltd. by a separate agreement. She contended that going by this reference, it becomes clear that the agreement for installation and commissioning of SCADA system was inseparable and supplementary to the agreement for purchase of SCADA system and the same was inextricably linked to the purchase of SCADA system. She contended that the payment made by the assessee to M/s Mesto Automation SCADA Solutions Ltd. for installation and commissioning of SCADA system thus was squarely covered in the exception provided in Explanation 2 to section 9(1)(vii) as well as is article 12(5)(a) of the DTAA between India and Canada. In support of this contention, she relied on the decision of Hon’ble Andhra Pradesh High Court in the case of CIT v. Sundwiger Enfg & Co. [2003] 262 ITR 110/129 Taxman 776. As regards the case laws cited by the learned DR, she contended that the same are distinguishable. For instance, she submitted that in the case of Jindal Tractebal Power Co. Ltd. (supra), the entire plant was not supplied by the party who rendered the services of installation and taking note of this fact, the case of the assessee was found to be beyond the scope of article 12(5)(a) of the Treaty by the Bangalore Bench of the Tribunal. She submitted that in the case of Airport Authority of India (supra), the applicability of article 12(5)(a) of the Treaty was not under consideration whereas the same has been held to be applicable in the case of the present assessee by the learned CIT(Appeals)
10. We have considered the rival submissions and also perused the relevant material on record. In the revised return, a claim was made by the assessee company that the amount paid by it to M/s Mesto Automation SCADA Solutions Ltd. towards installation and commissioning charges was not chargeable to tax in India as the same was covered in the exception given in Explanation 2 to section 9(1)(vii) and it was thus not liable to deduct tax at source from the said payment and there was no question of dis allowance of the amount paid to M/s Mesto Automation SCADA Solutions Ltd. by invoking the provisions of section 40(a)(i). As per Explanation 2 to section 9(1)(vii), fees for technical services does not include, inter alia, the consideration for any construction, assembly, mining or like project undertaken by the recipient. The AO disallowed this claim of the assessee mainly on the ground that there were two separate agreements entered into by the assessee with M/s Mesto Automation SCADA Solutions Ltd., one for supply and other for installation and commissioning. He held that the contract for installation and commissioning thus was a separate contract and M/s Mesto Automation SCADA Solutions Ltd. was not bound to provide the services of commissioning and installation in relation to system supplied by them to the assessee. He held that the amount paid by the assessee to M/s Mesto Automation SCADA Solutions Ltd. towards installation and commissioning charges thus was not covered in the exception provided in Explanation 2 to section 9(1)(vii). The learned CIT(Appeals), however, allowed the claim of the assessee on this issue holding that the said amount was covered in the exception provided in Explanation 2 to section 9(1)(vii) as well as in the article 12(5)(a) of the Treaty between India and Canada. The issue before us, therefore, is whether the consideration paid by the assessee company to M/s Mesto Automation SCADA Solutions Ltd. on account of installation and commissioning charges is covered by the exception provided in Explanation 2 to section 9(1)(vii) and/or under article 12(5)(a) of the relevant Treaty between India and Canada.
11. In order to ascertain whether the consideration paid by the assessee to M/s Mesto Automation SCADA Solutions Ltd. for installation and commissioning can be regarded as consideration for any construction, assembly, mining or like project undertaken by the recipient as envisaged in Explanation 2 to section 9(1)(vii), it is relevant to refer to the agreement entered into between the assessee and M/s Mesto Automation SCADA Solutions Ltd. for installation, application and commissioning of SCADA system, a copy of which is placed at page No. 27 to 47 of the assessee’s paper book. The scope of work of M/s Mesto Automation SCADA Solutions Ltd. is given in annexure 2 to the said agreement which broadly includes software development, project management, system design, system engineering and integration, pre-FAT, FAT & SAT training, supervision of installation and assistance in commissioning of SCADA system at the end user site as per the technical specification. This scope has been further elaborated in detail in annexure 2. However, going by the scope of work to be done by M/s Mesto Automation SCADA Solutions Ltd. broadly under the agreement, we find it difficult to accept the stand of the assessee that the consideration paid to M/s Mesto Automation SCADA Solutions Ltd. for the said work can be regarded as consideration for any construction, assembly, mining or like project undertaken by M/s Mesto Automation SCADA Solutions Ltd. as contemplated in explanation 2 to section 9(1)(vii). For this conclusion, we derive support from the decision of coordinate Bench of this Tribunal in the case of Hotel Scope vista Ltd. (supra) wherein it was held that “consideration for construction project” within the meaning of Explanation 2 to section 9(1)(vii) means consideration for actual construction activities undertaken in India and not the consideration for any services in connection with the construction project.
12. In so far as the DTAA between India and Canada is concerned, it is observed that article 12(4) thereof gives the definition of the term “fees for include services” while article 12(5)(a) provides that notwithstanding the said definition given in article 12(4), “fees for included services” does not include amount paid for services that are ancillary and subsidiary as well as inextricably and essentially linked, to the sale of property. In this context, we have carefully perused the agreement dated 29th April, 2000 entered into by the assessee with M/s Mesto Automation SCADA Solutions Ltd. for installation and commissioning work. In the said agreement, M/s Mesto Automation SCADA Solutions Ltd. is referred to as supplier/seller whereas the assessee company is referred to as buyer. Clause 1 of the said agreement gives definitions of the various terms and as per the definition given therein, “deliverables” are referred to as the items required for application and commissioning of SCADA system. Annexure F of the said agreement stipulates terms and conditions of letter of credit for work order for engineering, installation and commissioning of SCADA system. Further the scope of work description given in annexure 2 clearly makes out that the entire work to be done by M/s Mesto Automation SCADA Solutions Ltd. was for installation, commissioning etc. of SCADA system. It is worthwhile to note here that the said SCADA system was to be supplied by M/s Mesto Automation SCADA Solutions Ltd. as per the separate agreement entered into by the assessee simultaneously on the same date i.e. 29th April, 2000 and both the orders for supply of SCADA system and for installation and commissioning of said system were placed with reference to the same letter of intent dated 15th March, 2000. Having regard to all these facts of the case and the terms and conditions of both the agreements entered into between the assessee and M/s Mesto Automation SCADA Solutions Ltd. for supply of SCADA system and for installation and commissioning of the said system, we are of the view that the services rendered by M/s Mesto Automation SCADA Solutions Ltd. of installation and commissioning were ancillary and subsidiary, as well as inextricably and essentially linked, to the supply/sale of SCADA system and the amount paid for the said services by the assessee company was not chargeable to tax in India in the hands of M/s Mesto Automation SCADA Solutions Ltd. as fees for included services by virtue of article 12(5)(a) of the DTAA between India and Canada.
13. At the time of hearing before us, the learned DR has relied on the decision of Bangalore Bench of this Tribunal in the case of Jindal Tractebal Power Co. Ltd. (supra) to contend that in the similar facts and circumstances involved in the said case, article 12(5)(a) of the Treaty was held to be not applicable by the Tribunal. It is, however, observed that in the said case technical services and start-up/turnkey responsibility services rendered by one REOL were not only in respect of equipment supplied by REOL but were also in respect of equipment supplied by other contractors. In these facts and circumstances, it was held by the Tribunal that the services rendered by REOL could not be considered as ancillary and subsidiary as well as inextricably and essentially linked to the sale of property by REOL. In the present case, the facts involved however are different inasmuch as the installation and commissioning services rendered by M/s Mesto Automation SCADA Solutions Ltd. are only in respect of SCADA system supplied by them alone. The decision of the Tribunal in the case of Jindan Tractebal Power Co. Ltd. (supra) thus is not applicable in the present case being distinguishable on facts.
14. In view of the above discussion, we agree with the decision of the learned CIT(Appeals) to the extent that the amount in question paid by the assessee company to M/s Mesto Automation SCADA Solutions Ltd. towards installation and commissioning charges was for services that were ancillary and subsidiary as well as inextricable and essentially linked to the sale/supply of SCADA system and the same, therefore, was not chargeable to tax in India in the hands of M/s Mesto Automation SCADA Solutions Ltd. as fees for included services by virtue of article 12(5)(a) of the DTAA between India and Canada being favorable to the assessee. The assessee, therefore, was not liable to deduct tax at source from the said payment made to M/s Mesto Automation SCADA Solutions Ltd. and the dis allowance made by the AO by invoking the provisions of section 40(a)(i) was not sustainable as rightly held by the learned CIT(Appeals). In that view of the matter, we uphold the impugned order of the learned CIT(Appeals) deleting the disallowance made by the AO u/s 40(a)(i) and dismiss ground No. 1 of the Revenue’s appeal.
15. In ground No.2, the Revenue has challenged the action of the learned CIT(Appeals) in restricting the dis allowance of Rs. 7,25,000/- and Rs. 29,600/-made by the AO out of incidental expenses to the extent of 25%.
16. During the course of assessment proceedings, it was noticed by the AO that the incidental expenses of Rs. 7,25,000/- and Rs. 29,600/- claimed by the assessee as relating to Bangalore site were not fully vouched and verifiable. He, therefore, disallowed the said expenses. On appeal, the learned CIT(Appeals) restricted the dis allowance made by the AO on this issue to the extent of 25% following the appellate order of his learned predecessor in assessee’s own case for assessment year 2001-02.
17. We have heard the arguments of both the sides on this issue and also perused the relevant material on record. It is observed that a similar issue arose for consideration before the Tribunal in assessee’s own case for assessment year 2001-02 and vide its order dated 23rd January, 2008 passed in ITA No. 7875/-Mum/2004, the Tribunal upheld the order of the learned CIT(Appeals) restricting the dis allowance made on account of incidental expenses to the extent of 25%. As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to assessment year 2001-02, we respectfully follow the order of the Tribunal for assessment year 2001-02 and uphold the impugned order of the learned CIT(Appeals) restricting the disallowance made by the AO out of incidental expenses to the extent of 25%. Ground No. 2 of the Revenue’s appeal is accordingly dismissed.
18. In the result, the appeal of the Revenue is dismissed.
