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TMI Blog2010 (11) TMI 193X X X X Extracts X X X X X X X X Extracts X X X X ..... provider for Textile Automation and Baling Presses. GTA had supplied and installed a machinery baling press Model No.FTCS/600, at Stucken inSouth Africa. These machineries were uninstalled by GTA with the help of their technicians atSouth Africa. Such machineries had to be re-installed at the Appellant's factory premises. In this regard, the appellant approached GTA, who had agreed to deploy its technicians i.e. skilled engineers (mechanic, hydraulic and electronic software) for the reassembling and commissioning of the said machinery. An Agreement was entered onJuly 26, 2004 for re-installing and re-commissioning at the appellants premises the machinery. The appellant was liable to pay the consideration for reinstalling and re-commissioning inIndia. This consideration included Software/Electronic Equipments Cost, Mechanic Engineer's Cost, per day travel cost of these technicians and reimbursement of out of pocket expenses as per receipt. The Agreement dated 26.7.2006 which is in the form of a letter addressed by GTA to the Assessee, is as follows: "CONFIRMATION OF GULCHIERANI TECHNICIAN INTERVENTION FORRE-ASSEMBLYONSITE Dear Sirs, With reference to the agreements reached we co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9(l)(vii) by explanation (2) of the said section, which is as follows: "Explanation [2] - for the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries". The Appellant pointed out that the consideration that it was to pay to GTA was a payment for re-assembly and commissioning which would fall under the exclusion category of "consideration for any construction, assembly, mining or like project undertaken by the recipient". The Assessee relied on the decision of the Hyderabad Branch of ITAT in the case of ITO v. National Mineral Development Corporation (42 ITD 570). 2. The said payment is also not taxable as per Article 15 of DTAA between India and Italy (DTAA). As per Article 15 (i.e. "Independent Personnel Services") of the DTAA, income derives by a "resident of a contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtent there was no obligation on the part of the assessee to deduct tax at source. On this issue the CIT(A) was of the view that the reimbursement of expenses was not taxable and he, therefore, directed the AO not to include reimbursement of expenses from the fees for technical services and re-compute the tax. 8. Another issue raised by the assessee was with regard to the action of the A.O. in imposing education cess on the payments made to the non-resident. On this aspect, the learned CIT(A) held that education cess cannot be levied. 9. Aggrieved by the relief granted by the CIT(A), the revenue is in appeal before the Tribunal. Aggrieved by the order of the CIT(A) holding that the payment in question in part is payment for technical services rendered, the assessee has preferred the present appeal before the Tribunal. ITA Nos. 7675/M/07 and 7526/M/07 10. ITA No. 7675 is an appeal by the appellant while ITA No. 7526 is the appeal by the revenue. Both the appeals are directed against the order dated 14.9.2007 of CIT(A)-XXXIII, Mumbai relating to the assessment year 2006-07. The facts in these appeals are identical to the facts as in the earlier years. The only difference is with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this regard in the grounds of appeal apart from challenging the order of the CIT(A) holding that the payment in question in part is a payment for technical services rendered. The revenue for its part has filed its appeal against the decision of the CIT(A) holding that reimbursement expenses are not chargeable to tax. 13. We have heard the rival submissions. The learned counsel for the assessee reiterated the submissions as were made before the lower authorities. On the applicability of Article 15 of the DTAA even artificial persons like a company, the learned counsel for the assessee relied on the decision of the Mumbai Bench of the Tribunal in the case of Maharashtra State Electricity Board v. DCIT 90 ITD 793. 14. His further submission was that under Article 5(2)(j) of the DTAA supervisory activities constitutes business income and since the assessee did not carry on the supervisory activity in India for the required number of days, it cannot be said that the assessee had P.E. in India and therefore, the amount in question cannot be brought to tax. In this regard, the learned counsel for the assessee relied on the following decisions of the Authority for Advance Rulings, New ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjudication. 19. We have considered the rival submissions. First we shall take up for consideration the argument that the payment in question falls within the exclusion clause of Expln.-2 to section 9(l)(vii) of the Act. "Explanation [2] - for the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries". The question whether the amount payable under the contract would be exempt on the ground that it is consideration for "construction, assembling mining or like projects" undertaken by GTA in India has to be answered by taking a look at the agreement between GTA and the appellant. The first aspect which we notice is that the technicians of GTA did not come to India to render service to the appellant in connection with a contract by which they also supplied the machinery whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices should not be for construction, assembly etc. According to the contract it is clear that the technicians are here only for supervising the erection of the conveyor belts. Two persons by themselves certainly cannot erect the conveyor belt. It is to be the work of many others. These two technicians are there only to supervise the erection and giving technical advice in connection with the erection. We agreed with the learned DR in that case that technical fee is for technical advice in connection with erection and the actual erection was done by others. Having thus found that the payment of technical fee was agreed upon on a separate, distinct and different contract from the original contract and the payment of technical fee is only for giving technical advice in connection with the erection and not for undertaking the erection by the NR, we disagreed with the CIT(A) that when she held that the amount payable was in connection with construction, assembly etc." 20. The above observations of the Tribunal are applicable to the facts of the present case. The facts in the case of the appellant in this appeal, as already observed is that it was a simple case of rendering service by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt in question cannot be taxed in the hands of GTA since GTA did not have a permanent establishment in India. Article 5(2) (j) provides that the term "permanent establishment" includes especially, "a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites projects or activities, if any) continue for a period of more than six months, or where such project or supervisory activity, being incidental to the sale of machinery or equipment, continues for a period not exceeding six months and the charges payable for the project or supervisory activity exceed 10% of the sale price of the machinery and equipment." Article 13(1) to (5) of the DTAA is as follows: "Article 13 Royalties and fees for technical services 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the project in connection with which the supervisory services are rendered continues for a period of more than six months in India. The question is when the services rendered in India were supervisory in nature and when the period of the project is less than six months whether the payment should be considered as Fees for Technical Services or under Article 5(j) of the DTAA. 23. Similar issue had come up for consideration before the AAR in the case of Horizontal Drilling International (supra). The facts in the aforesaid case were that the applicant before the AAR was a company incorporated in France which was awarded a contract on 25.10.1996 by the Gas Authority of India Ltd. (GAIL) for installation of gas pipelines crossing under Yamuna River with optic fibre cable using horizontal drilling technique near Agra for a lum sum consideration of US $9,60,000. The work commenced with the import of the drilling rig on 20.1.1997 and its installation was completed on 14.2.1997. On the installation of the rig 10% of the contract amount had to be paid to the applicant. The work under the contract was completed on 4.3.1997. GAIL moved an application before the ITO under section 195 seeking a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or assembly project" but only where such site or project continues for a period of more than six months. It would not be correct to charge profits where there is no establishment of the nature envisaged in article 5. In the above situation, a more apposite construction would appear to be to read the two articles harmoniously and include within the definition in paragraph 4 of article 13, only payments made in consideration for services qua services and correlated thereto and excluding from its purview payments made in consideration of the execution of a construction or installation project or the like referred to in paragraph 3 of article 5. That the concept of a "fee for technical services" has to be read subject to such an inherent limitation built into it can also be seen from the definition of the expression contained in the Explanation to section 9(T)(vii) of the Income-tax Act, 1961. This is a special statutory definition and cannot be straightaway imported into the DTAA. But even so, there must be a rationale for the exclusion, which can only be, that consideration for projects of the nature mentioned, cannot be equated to consideration for services rendered in the course of ..... 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