Conducting of impact tests on cars amounts to rendering of
technical services/information; and amounts paid to a French Company were ‘fees
for technical services’, chargeable to tax in India.
Facts
The assessee was an Indian company (IndCo) engaged in
manufacture of cars. Cars manufactured by it were sold globally. For evaluation
of the safety of the cars, impact tests were required to be done on the cars.
For conducting the tests, IndCo engaged a company which was a tax resident of
France (“FrenchCo”). FrenchCo was in the business of conducting impact rests on
automobiles, and manufacturers from all over the world would approach it for
conducting the tests.
FrenchCo conducted tests on IndCo’s cars only in France. At
the time of the tests, representatives of IndCo were also present. After
conducting the tests, FrenchCo furnished impact testing reports to IndCo. These
reports contained only test results and did not make available or provide any
technical know-how, knowledge or expertise to IndCo.
IndCo applied to the AO for remittance of the amount to
FrenchCo without deduction of tax. According to IndCo:
-
The payments
were not in the nature of technical services;
-
There was no
enrichment or gaining of technical knowledge or expertise by IndCo;
-
FrenchCo had
merely performed its business in France;
-
FrenchCo had
not transferred any knowledge by which IndCo could carry out testing;
-
The tests
were required for obtaining regulatory approval; and
-
Hence, the
payments were not fees for technical services as defined in Explanation 2 to
Section 9(1)(vii) of the Income-tax Act.
However, the AO concluded that FrenchCo had the expertise and
the skill to perform the tests and it had rendered technical services.
Accordingly, the AO directed IndCo to deduct tax @10% from payments being made
to FrenchCo.
In appeal, CIT(A) confirmed that as the testing charges were
paid in consideration for services of technical nature, they were ‘fees for
technical services’ within the meaning of Section 9(1)(vii) of Income-tax Act
and Article 13 of India-France DTAA.
Before the Tribunal, apart from the foregoing contention,
relying on Kolkata Tribunal’s decision in DCIT Vs ITC Ltd [2002] 82 ITD 239 (Kol),
IndCo also contended that the definition of ‘fees for technical services’ in
Article 13(4) of India-France DTAA should be interpreted in the context of other
treaties between India and a member-State of OECD. It submitted that the tests
reports were just like blood test reports of a pathological laboratory and that
there is a vast difference between technical services and a technical report
obtained from a technician. From the test reports, IndCo simply came to know of
the deficiencies in the design of its cars and hence it could not be called
technical services. It also relied on Mumbai Tribunal’s decision in Raymond Ltd
Vs DCIT [2003] 86 ITD 791 (Mum). It further contended that impact testing
charges were paid for use of a standard facility which was provided by FrenchCo
to all those willing to pay and, therefore, it could not be construed as fees
for technical services. In support of this contention, it relied on Skycell
Communication Ltd Vs DCIT [2001] 251 ITR 53 (Mad), CESC Ltd Vs DCIT [2003] 87
ITD 653 (Kol) (TM),) NQA Quality Systems Registrar Ltd. v. Dy. CIT 2 SOT 249
(Del), National Organic Chemical Industries Ltd Vs DCIT [2005] 96 TTJ (Mum) and
DCIT Vs Boston Consulting Group Pte Ltd [2005] 94 ITD 31 (Mum).
The Tribunal referred to definition of ‘fees for technical
services’ in Article 13(4) of India-France DTAA and also in Explanation 2 to
Section 9(1)(vii) of the Income-tax Act. It observed that after excluding the
consideration for construction, etc., project or “salaries” from the definition
in Explanation 2 to Section 9(1)(vii) of Income-tax Act, both definitions were
same and would include payments made to any person in consideration of a
managerial, technical or consultancy services. The Tribunal also referred to
definitions in India-UK DTAA, India-USA DTAA and India-Switzerland DTAA and
observed that in these DTAAs, unless the fees for services were ancillary and
subsidiary, as well as inextricably and essentially linked to the sale of
property which is attributable to a PE and fulfills other requirements under the
business profits Article, they cannot be taxed in a source country. Thus, the
scope of ‘fees for technical services’ in these treaties was much restricted
than that under India-France DTAA.
The Tribunal further observed that the impact tests were not
in the nature of managerial services.
Held:
The impact tests were to be performed so as to pass the
quality tests. The presence of IndCo’s representatives was with an intention of
getting experience. Therefore, they were in the nature of technical services
which enhanced the product development capacity of IndCo. As the test reports
were used by IndCo for modification of its products, it would amount to
rendering of technical services/information and hence, the amounts paid would be
in the nature of fees for technical on consultancy services.
The decision in ITC Ltd was held distinguishable on the
ground that that case involved purchase of equipment. The foreign company did
not have any PE in India to which such income could be attributed. The payments
made for installation and commissioning of equipment were related to technical
services, which were ancillary and subsidiary as well as inextricably and
essentially linked to the sale of the property; and hence, it was held that the
payments were not liable to be taxed in India,
