In the absence of revenue having brought anything on record to show that assessee was doing construction work, consideration received by assessee was not from doing construction work and consequently, did not fall within the exclusion of Explanation 2 to section 9(1)(vii). Therefore, the income of assessee was liable to tax in terms of section 115A @10%.

In the absence of revenue having brought anything on record to show that assessee was doing construction work, consideration received by assessee was not from doing construction work and consequently, did not fall within the exclusion of Explanation 2 to section 9(1)(vii). Therefore, the income of assessee was liable to tax in terms of section 115A @10%.

• Taxpayer (FCO) was a Russian company having its registered office in Moscow. It was engaged in the business of laying and installation of gas and liquid pipelines.
• FCO was a part of a consortium led by an Indian company (KPTL). The consortium was awarded a contract by Gas Authority of India Ltd. (GAIL) for a pipeline project in India.
• For the purposes of executing the pipeline project, FCO and KPTL executed a co-operation agreement between themselves for determining each other’s responsibilities and also manner of sharing revenue from the pipeline project. ? As per the co-operation agreement, FCO’s share in revenue was 3% and KPTL’s share 96%. Balance 1% was kept aside to meet common expenses of the consortium. Also, in terms of the agreement, any surplus out of 1% would go to KPTL and deficit, if any, would be met by KPTL.
•  The agreement further provided that KPTL was responsible for arrangement of resources and expenses including common expenses of the consortium. KTPL was also required to arrange bank guarantees, insurance, machinery, manpower, etc. for the project.
•  FCO offered income arising from the pipeline contract, as Fees for Technical Services (FTS), and claimed benefit of concessional rate applicable to gross basis of taxation.
•  The Tax Authority rejected claim of FCO and held that in terms of GAIL’s engagement letter, the contract was awarded to the consortium for laying the pipeline. Therefore, nature of work carried on by FCO being construction, assembly, etc., the same would fall within the exclusionary clause of section 9(1)(vii) of the ITA and would therefore not be FTS eligible for concessional rate of taxation. Accordingly the amount would be assessable as business income and is subject to tax u/s.44DA r.w. Article 5 & 7 of the DTAA. On this basis, the Tax Authority taxed entire income received by FCO from the project at a higher rate of 40%.
•  FCO contended that (a) it was not engaged in any construction or assembly activity so as to attract the exclusionary clause u/s.9(1)(vii) of ITA (b) The co-operation agreement between the consortium members clearly specified scope of FCO’s work which was related to drawing, designing and supervisory activities. (c) Therefore, the concessional rate of tax as provided u/s.115A(1)(b)(BB) @ 10% r.w. Article 12 would be applicable to its share of revenue.
•  The matter was referred to the Dispute Resolution Panel (DRP), which confirmed the action of the Tax Authority.

 Held

•  Terms of contract alone are not the deciding factor. It is important to see the actual activity undertaken by FCO. The cooperation agreement between the FCO and KPTL clearly spells out the scope of FCO’s work which is as under:
•  Design and engineering for various aspects
•  Preparation of welding procedure and welder qualification procedure
• Review work procedure for pipeline laying, and
•  Deputation of experts for site review of implementation by KPTL and technical services by FCO
•  The Tax Authority could not prove that FCO’s work extended beyond designing, supervising, etc. Even the personnel deputed by FCO were for purpose of site review and technical supervision. Entire construction work responsibility was undertaken by KTPL.
•  Ratio of the Delhi ITAT in the case of Voith Siemens Hydro Kraftwerkstechnik GMBH & Co1 is applicable to the current case. In that case the ITAT held that though under terms of the contract, the taxpayer could be assumed to be liable to do assembly erection, testing and commissioning of power project as also the supervision thereof, in the absence of any evidence that the taxpayer actually undertook any activity other than supervision, the nature of activity carried on by it cannot be said to fall within the meaning of the term ‘construction and assembly’ under the exclusion clause of section 9(1)(vii) of the ITA.
•  The Tax Authority accepted the sharing ratio of 3% of gross receipt as FCO’s income, i.e., onepart of the cooperation agreement, but did not accept the other part of the agreement that FCO is providing only technical assistance. If the Tax Authority was of the view that FCO is engaged in construction, assembly, etc., income from the contract should have been computed after reducing all contract expenses and not on the basis of gross receipts as computed by the Tax Authority.
•  Provisions of section 44DA are applicable where the contract in respect of which FTS has been paid is effectively connected with a PE where FCO is carrying on business operations in India. In the facts of the case, activities were not effectively connected with installation work of KPTL.
•  FCO’s income from the project undertaken by the consortium is in the nature of FTS under provision of sections 9(1)(vii) and 115A(1)(b)(BB).