By Geeta Jani, Dhishat B. Mehta, Chartered Accountants
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Where the Applicant had entered into two separate contracts – one for supply of plant and another for erection and installation services, and the period between supply of plant and commencement of erection and installation services was considerable, the services could not be said to fall under the exception in Article 12(6)(a) of India-Netherlands DTAA.
Facts:
The Applicant was a company incorporated in, and resident of, Netherlands (“DutchCo”). The Applicant entered into two contracts with an Indian company (“IndCo”) on the same day. The first contract was for supply of machinery, spare and technical documentation for production of certain products. The second contract was for supply of project services for erection and installation of the machinery supply under the first contract. DutchCo supplied machinery under the first contract and thereafter, approached AAR for its ruling on the issue whether the payments made by IndCo towards project services were chargeable to tax, either under I T Act or under India- Netherlands DTAA.
DutchCo contended that both the contracts were entered into on the same day, they were part of the same transaction, the consideration was also dependent on each other and the contract for project services was ancillary and inextricably linked to the supply contract. Accordingly, in term of Article 12(6) (a) of DTAA, it would not be FTS. The tax authority countered that once DutchCo and IndCo having treated the two contracts as separate contracts, it was not open for DutchCo to plead otherwise.
Held:
The AAR observed hand held as follows.
? The DutchCo did not dispute that the payments were FTS, but claimed that the payments were for services that were ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property.
? It was really an indivisible contract which was artificially split up, possibly, to avoid tax.
? It was hence, not open for DutchCo to claim that the project services contract was for services that were ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property.
? While the supply of plant was completed on 5th December, 2009, the supply of services was ‘expected to commence from March 2011’, which showed lack of proximity between the two contracts.
? Therefore, the payments under the second contract were fees for technical services not falling within the exception in Article 12(6)(a) of India-Netherlands DTAA.
