India-Austria DTAA , India-Belgium DTAA , India-
China DTAA , India-Germany DTAA , India- Switzerland DTAA , India-UK
DTAA and India- US DTAA ; section 5(2)(b), 9(1)(vii) the Act – Payments
made to non-resident suppliers of plant for installation/commissioning
services do not create an installation permanent establishment (PE),
since the activities did not exceed the threshold provided in the DTAA
s; FTS being a general Article and PE being a specific Article,
taxability of consideration should be confined to specific PE Article
Facts:
The
taxpayer is an Indian company engaged in manufacture and sale of
cement. During the relevant tax year, the taxpayer made payments to
certain non-resident suppliers for import of plant and machinery. The
suppliers were located in Austria, Belgium, China, Germany, Switzerland
UK and US. The suppliers also provided installation and commissioning
services and their technicians visited India for that purpose. The
taxpayer did not withhold tax in India on the ground that since the
plant and machinery were supplied from outside India, the payments for
the same were not chargeable to tax under the Act. The taxpayer
separately paid installation and commissioning fee and withheld tax @
10% thereon under the Act.
The tax authority concluded that:
the
contract was a “composite contact” or “works contracts”; ? taxpayer
paid the suppliers for supply of plant as well as installation and
commissioning services;
the consideration for provision of
installation and commissioning services was not paid separately but was
embedded in payments for supply of plant;
the taxpayer was
required to approach the tax authority for determination of chargeable
income and withholding tax thereon and in absence of that, was required
to withhold tax on the total payment.
Therefore, the tax
authority treated the taxpayer as “assessee in default” u/s. 195 read
with section 201 of the Act and held that the taxpayer should have
withheld tax @ 42.25% of the gross remittance amounts.
Held:
(i) As regards I. T. Act
Part
of the consideration for purchase of plant that can be attributable to
installation commissioning or assembly of the plant and equipment or any
supervision activity in connection thereto accrues and arises in India.
Hence, it is taxable u/s. 5(2)(b) of the Act since the related
economic activity is performed in India. Because income accrues or
arises in India, one need not look at deeming fiction u/s. 9(1)(vii) of
the Act. It is for that reason that definition of FTS in Explanation 2
to section 9(1)(vii) specifically excludes “consideration for any
construction, assembly. Mining or like project”.
The expression
installation, commissioning or erection of plant and equipment belongs
to the same genus as expression ‘assembly’. Thus, ‘assembly’ is excluded
from the scope of section 9(1)(vii) of the Act.
As regards DTAA
India
has entered into DTAA s with all the seven tax jurisdictions where the
suppliers are located. All these DTAA s provide minimum time threshold
under installation PE clause and the installation and commissioning work
by any supplier did not exceed the minimum time threshold under any of
the DTAA s.
Further, India-Belgium and India-UK DTAA
additionally provide that even when threshold time limit is not
exceeded, installation PE is constituted if the installation/
commissioning charges exceed 10% of the sale value of the plant. This
condition too was not fulfilled.
Accordingly, no installation PE
was constituted and even if a part of the consideration can be
attributed to installation/commissioning activities, it will not be
taxable in terms of Article 7 read with Article 5 of the relevant DTAA .
(iii) As regards FTS/FIS
Installation/commissioning activities are de facto in the nature of technical services.
While
FTS/FI S article dealing with technical services is a general
provision, Article dealing with installation PE is a specific provision.
In Union of India vs. India Fisheries (P) Ltd. [57 ITR 331 (1965)], the
Supreme Court has held that if there is an apparent conflict between
two independent provisions, the special provision must prevail over the
general provision. If, even when PE was not constituted, the income is
considered taxable under FTS Article, it would not only render PE
provisions meaningless but would also be contrary to the spirit of the
commentary on UN Model Convention.
Hence, if there are services
which are covered under a specific PE clause and also under FTS/FIS
provision, the taxability of consideration for such services must be
confined to that specific PE clause.
In case of India-UK and
India-USA DTAA , even if FTS/ FIS article applies, as the ‘make
available’ condition was not satisfied, the payment was not FTS/FIS.
Installation/ commissioning did not involve transfer of technology and
hence, such activities did not satisfy ‘make available’ condition.
As India-Belgium DTAA includes MFN clause, same tax position as India-UK/US DTAA applies.
Article
12(5)(a) of India-Switzerland DTAA specifically excludes “amounts paid
for … … services that are ancillary and subsidiary, as well as
inextricably and essentially linked, to the sale of a property” (i.e.,
plant in this case) from the scope of FIS. Accordingly installation/ commissioning charges were not FIS under India- Switzerland DTAA .
