Article 12, 14, India-Switzerland DTAA; Section 9(1)(vii), the Act – Installation and commissioning of plant and machinery being “assembly”, consideration therefor is excluded under Explanation 2 to section 9(1)(vii) of the Act. While the payment for classroom training would be FTS under Article 12, that for shop floor training would not be covered by Article 12.
Facts:
The taxpayer was an Indian company engaged in the business of printing and publishing of newspapers. The taxpayer entered into two contracts with a Swiss company (“Swiss Co”) – one contract was for supply of plant and machinery and second contract was for installation and commissioning of the plant and machinery and operational training of the staff. The taxpayer did not withhold tax from the payments made to Swiss Co under both the contracts.
According to the AO, the payments made under the second contract were in the nature of FTS and therefore, the taxpayer was required to withhold tax on the same. In appeal, CIT(A) concluded that 75% of the payments under the second contract were towards installation and commissioning, which was in the nature of “assembly” and therefore, was excluded in terms of Explanation 2 to section 9(1)(vii) of the Act and the balance 25% being towards training of employees, was FTS.
Held:
Installation and commissioning of plant
The plant and machinery comprised of various components/ units, which had to be put together and aligned in a manner that they would function optimally. Such activity would qualify as “assembly”. Accordingly, the consideration paid to Swiss Co towards installation and commissioning will not be FTS in terms of the definition in Explanation 2 to section 9(1)(vii) of the Act. ? As regards India-Switzerland DTAA, though the consideration would be FTS in terms of Article 12(4), Article 12(5)(b), inter alia, excludes services covered by Article 14 which deals with “Independent Personal Service”. Since the engineers deputed by Swiss Co had stayed in India for less than 183 days, in terms of Article 14, the consideration was taxable only in Switzerland.
As regards the issue whether Article 14 applies also to a non-individual, it may be noted that in Christiani & Nielsen Copenhagan vs. ITO [1991] 39 ITD 355 (Bom), the Tribunal had held that Article dealing with “Independent Personal services” applied only in case of individuals was in the context of India-Denmark DTAA, which specifically mentioned “individual” whereas India- Switzerland DTAA mentions “resident”, which term also includes non-individuals. However, in MSEB vs. DCIT [2004] 90 ITD 793 (Mum), in the context of India- UK DTAA, the Tribunal has held that “Independent Personal services” Article applies to all the residents. Accordingly, Swiss Co was qualified for benefit under Article 14.
Training of staff
Training services include both class room training and shop floor training (i.e., training on the machine). While the payment for classroom training would be FTS under Article 12 that for shop floor training would not be covered under Article 12.
