TMI Blog2014 (11) TMI 442X X X X Extracts X X X X X X X X Extracts X X X X ..... contract for supply and that for the services in the contract for services - the equipment could be installed by anybody, with the only requirement, that the person who installs the equipment, should be certified by the vendor, as qualified to install the same - This is not the same as saying that qualified personnel of the vendor should install the equipment as is only indicated in the bid document and not in the contract signed by the assessee – the contention of the assessee that the services rendered by FERAG AG, by way of installation, commissioning of the mailroom equipment and the training of the assessee’s employees as inextricably and essentially linked to the sale of the mailroom equipment and hence not taxable separately as “Fees for Technical Services”, cannot be accepted. The services rendered by FERAG AG, towards installation and commissioning of the mailroom equipment and training are “Fees for Technical Services” as defined under the Act, the consideration paid towards these services are only taxable in Switzerland in the hands of FERAG AG, by virtue of the provisions of Article 14 of the DTAA between India and the Swiss Confederation - the Treaty between India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iddle of the night, to ensure delivery to the vendors, to be delivered to the readers between 5.00 a.m. and 7.00 a.m. in the morning. For this purpose, it needed a sophisticated plant and machinery (commonly known as mail room equipment ) that could collate the various pages of the newspaper, which assisted in printing, picking and stacking them and pack the news papers for timely delivery within the shortest time to its readers. The mail room equipment, therefore, required a complex plant with installed machinery, complete with conveyor belt, which could collate various pages of the newspaper for fast packing for delivery. 4. To acquire such a plant and machinery, the assessee called for global bids for supply, delivery and installation of the plant and machinery and training of its staff. The bid was closed in favour of M/s FERAG AG, Switzerland. 5. The assessee, therefore, entered into two contracts on 8th February 2005 with M/s FERAG AG, Switzerland, a company registered in Switzerland, aggregating to CHF 7,915,000/- (best price, APB 21), of which one for the supply of the various components/units of the mail room equipment, and second for installation and commissioning o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of FERAG AG, Switzerland. (c) Assuming, that the payment made towards installation and commissioning of the components/units of the mail room equipment and training of the employees are chargeable to tax under the Income Tax Act in the hands of FERAG AG, Switzerland, the said services are covered by Article 14 of the Double Tax Avoidance Agreement between India and the Swiss Confederation and therefore was only chargeable to tax in the hands of FERAG AG, Switzerland in Switzerland. 8. The CIT(A), while negating the submissions advanced by the assessee in the alternative as in 7(a) and (c) above, upheld the submission as in para 7(b) above. To come to this conclusion, the CIT(A) relied upon the definition of the expression assembly as appearing in Black s Law Dictionary, The New International Webster s Students Dictionary and Little Oxford Dictionary, and held that the installation and commissioning of the components/units of the mail room equipment was assembly under Explanation 2 to Section 9(1)(vii) of the Act. In so holding, he placed reliance on the decision of the coordinate Bench of the ITAT, Hyderabad Bench, in the case of ITO vs National Mineral Development Corpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he supplied goods were installed and put into operation by the vendor certified personnel. 12. The AR, then, referred to the agreement of installation, commissioning and training (called Service Contract), which was also signed on 8th February, 2005, which formed part of the APB at pages 56 to 79. He specifically referred to paras 3.2 and 3.3 at APB 60, which referred to the activity of installation and commissioning in the following words: Bringing and positioning the various components of the equipment; Properly aligning the entire equipment; Properly connecting the individual units; Ensuring that unnecessary vibrations, heat generation is avoided; Ensuring that all safety features provided by the vendor are properly erected and found to be delivering the desired results; Testing the mechanical, electrical and control functions to ensure that : All the components are working in unison as per the design of the vendor; Individually and collectively the components are working to the maximum rated capacity; The power drawn by the various components are within the limits prescribed; To undertake the necessary white paper runs are w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... positioned, aligned and properly connected individually, keeping in mind that safety is to be ensured, so that vibrations ceased to exist and the power consumption was not compromised when the machines and components were to be individually and/or collectively working to maximum capacity. The detailed activity was prototyped by the engineers deputed by FERAG AG, as enumerated in paras 3.2 and 3.3 of the Contract of Service. The entire activity was carried out over a period of 106 days. He, therefore, submitted that the services carried out by FERAG AG, by way of installation and commissioning were in the nature of construction, assembly as appearing as the exclusions in the definition of Fees for Technical Services under Explanation 2 to Section 9(1)(vii) of the Income Tax Act and hence the consideration paid to FERAG AG, was not chargeable to tax as FTS. 17. In this connection, the AR relied upon the decision of the Hon ble ITAT, Hyderabad Bench in the case of ITO vs National Mineral Development Corporation Ltd., reported in 42 ITD 570. He argued that the facts in the said case were identical as that of the assessee and referred to the following para appearing at page 580 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aning as was given in Explanation 2 to Section (1)(vii) . 18. Submitting further, the AR pleaded, assuming, without admitting, that the consideration was chargeable to tax as Fees for Technical Services under the Act, the said services fell within the ambit of independent personal services as defined in Article 14 of the DTAA between the Government of India and the Swiss Confederation, as notified on 21st April 1995. Hence, the said consideration was only taxable in Switzerland and not in India. 19. He, therefore, drew our attention to the said Treaty appearing at pages 80 to 91 of the Paper Book. Para (5) of Article 12 of the said Treaty appearing at page 85 read as follows: Notwithstanding paragraph 4, Fees for Technical Services does not include amounts paid: a) For teaching in or by educational institutions; b) For services covered by Article 14 or Article 15 as the case may be. 20. Relying on the above, the AR submitted, that though the services rendered by FERAG AG, towards installation, commissioning and training, would fall within the expression Fees for Technical Services as defined in Para (4) of Article 12 of the Treaty, but in view of para (5)(b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eaty. 23. The AR then referred to the observations of the eminent authors, Dr. S. Rajaratnam and Mr. B.V. Venkataramiah, in their commentary on Double Tax Treaties to substantiate that the engineering services rendered by FERAG AG would fall under Article 14 of the Treaty and not under Article 12 :- An engineer may offer engineering services, which is ordinarily understood as a technical service, but as long as the assignment is a professional one in the nature of independent service, it will more readily fall under this Article than the Article relating to technical service, especially in the context of technical service being understood as parting with technology. 24. As regards the appeal filed by the assessee against the finding of the CIT(A) that 25% of the consideration is attributable towards training and hence exigible to tax as Fees for Technical Services , the AR submitted that the estimation made by the CIT(A) of 25% of CHF 664,000/- towards training was highly excessive. In this connection, the AR filed the break-up of CHF 664,000/- given by FERAG AG, according to which, only CHF 17,500/- was the attributable towards training. Based on this fact, as per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) In CGG Veritas Services SA., vs Addl. DIT (Intl. Taxation), the recipient of the consideration, was engaged in providing geological and geo-physical services in the form of seismic surveys in the offshore waters under contract with ONGC. The consideration received by the recipient was hitherto taxed under Section 44BB of the Act but, however, in the assessment year involved the AO invoked Explanation 2 to Section 9(1)(vii) of the Act and sought to tax the consideration as Fees for Technical Services . The Assessee in the said case had taken shelter that the project being a mining project, it fell within the exception provided under Explanation 2 of Section 9(1)(vii) of the Act. The AR invited pointed out that in para 21 of the order in which the reason as to why this argument did not find favour with the Bench was indicated. From the same, the AR argued that it was apparent that though the assessee in the said case carried on a mining project, the additional condition that Project should be undertaken by the assessee was not satisfied in order to avail of the exception. In the present case, the AR submitted that the project of assembling the mail-room equipment was, in fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stwhile India UK Treaty, to hold that the relevant Article was applicable to all residents of a contracting state. 30. In the circumstances, the AR submitted that in accordance with India Swiss Treaty, Article 14, applied to FERAG AG, and, consequently, the consideration paid towards installation, commissioning and training qualified as Independent Personal Services and was therefore, taxable only in Switzerland. 31. We have considered the rival submissions and also perused the relevant materials on record. It is undisputed that the mailroom equipment comprised of various units and was hence a complex equipment. The bid document clearly stipulated that the units/components of the mailroom equipment would have to be installed and commissioned by trained and qualified personnel of the supplier, who shall, then provide training to the assessee s employees, on the operation and maintenance of mailroom equipment. The price quoted included installation, commissioning and training. The mere fact, that both the contracts, i.e. for supply of the mailroom equipment and its installation, commissioning and training were entered into on the same date would not lead to an automatic concl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tall the same. This is not the same as saying that qualified personnel of the vendor should install the equipment as is only indicated in the bid document and not in the contract signed by the assessee. In the circumstances, the first contention of the AR that the services rendered by FERAG AG, by way of installation, commissioning of the mailroom equipment and the training of the assessee s employees as inextricably and essentially linked to the sale of the mailroom equipment and hence not taxable separately as Fees for Technical Services , cannot be accepted. 33. The next contention of the assessee was that the consideration towards installation and commissioning of the mailroom equipment and training of the employees of the assessee does not fall within the definition of the expression Fees for Technical Services under Explanation 2 to Section 9(1)(vii) of the Act. This argument of the AR is based on the view that the services rendered by FERAG AG, will fall within the purview of the word Assembly appearing in the expression construction, assembly or like project undertaken by the recipient . This argument found favour with the CIT(A). In support of the same, the AR has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... installation and commissioning of the mailroom equipment and training are Fees for Technical Services as defined under the Act, the consideration paid towards these services are only taxable in Switzerland in the hands of FERAG AG, by virtue of the provisions of Article 14 of the DTAA between India and the Swiss Confederation. It is seen that though, the Treaty between India and Swiss Confederation in Article 12(4) defines Fees for Technical Services , as including the services rendered by FERAG AG, towards installation and commissioning and training, Article 12(5) provides that services covered under Article 14 of the Treaty will not qualify for Fees for Technical Services . Article 14 of the Treaty, though, overrides Article 12(4) while defining the term Professional Services , includes independent activities of engineers. Such independent engineering activities would not cover training given to the employees of the assessee. Though a training activity may be connected to an engineering concern, that by itself, would not constitute training, to be an engineering activity so as to fall within professional services under Article 14 of the Treaty. 36. It is also common gro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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