Section 9(1)(vii) of the Act, Article 12 of
India-Poland DTAA – A ‘contract of work’ is different from a ‘contract of
service’. In ‘contract of work’, the activity is predominantly physical whereas
in ‘contract of service’, the activity is predominantly intellectual. Hence,
payment made under ‘contract of work’ did not constitute FTS.
Facts
The Taxpayer is an Indian company. The
Taxpayer engaged a Polish company for dismantling of machinery, sea worthy
packing of the same, stuffing it in containers and loading the containers on
trucks. The Polish company carried out the said services in Sweden. In
consideration for these services, the Taxpayer made certain payments to the
Polish company without withholding tax from the payments.
The AO concluded that the payments made to
the Polish company for dismantling and sea worthy packing of machinery was
highly technical and skill oriented and hence it was in the nature of “fees for
technical services” (FTS) in terms of section 9(1)(vii) of the Act as well as
Article 13(4) of India-Poland DTAA. The CIT(A) reversed the decision of the AO
on the grounds that though technical personnel were involved in the work done
by Polish Company, the payment was for a works contract and not for a contract
of service.
Held
– The
agreement for dismantling of the machinery was part and parcel of the
transaction of purchase of plant and machinery. Perusal of various clauses of
the said agreement showed that the payment was not made for technical services
and did not require any technical skill.
– The
two expressions ‘Contract of work and ‘Contract of service’ convey different
ideas. In ‘Contract of work’, the activity is predominantly physical and
tangible and intellectual only to some extent. Though the work of a gardener,
mason, carpenter or builder who undertakes “contract of work” also involves
intellectual exercise as he has to bestow sufficient care in doing his job, the
physical (tangible) aspect is more dominant than the intellectual aspect. On
the other hand, in ‘Contract of service’, the activity is predominantly
intellectual, or at least, mental.
– Thus,
‘contract of work’ is clearly different from ‘contract of service’. ‘Contract
of work’ does not require any technical knowledge or specific skill.
– In
case of the Taxpayer, Polish company was hired to dismantle the machinery,
which did not require any technical expertise and special skill. Thus, the
agreement was for ‘contract of work’. The payment did not acquire character of
FTS merely because the Taxpayer hired a person resident outside India.
– In
case of the Taxpayer, Polish company was hired to dismantle the machinery which
was in the nature of ‘contract of work’ and not ‘contract of service’. Hence,
payment made by the Taxpayer for the work done by Polish company did not come
within the ambit of FTS.
