TMI Blog2016 (4) TMI 590X X X X Extracts X X X X X X X X Extracts X X X X ..... ight to use, payment cannot be treated as royalty within the meaning of art. 12 of the DTAA,that payment received by the petitioner a Singaporean company, as a subparticipant of GIA’s network from Indian clients for collecting and shipping diamonds and certification thereof by GIA did not fall within the expression royalty. Respectfully following the judgment of Diamond Services International (P)Ltd. (2007 (12) TMI 182 - BOMBAY HIGH COURT ),we reverse the order of the FAA.We hold that the payment made to Liftech was not royalty or FIS or FTS and the assessee was not supposed to deduct tax at source for making the payment to Lifetech and therefore cannot be treated as assessee in default. - Decided in favour of the assessee. Existence of PE in India - AO held that part of the basic installment and purchase agreement included element of service contract also,that the job done under the basic agreement could be termed FIS - Held that:- Dervices rendered in setting up of machine could not be treated as personal service even if the agreement for rendering the services was embodied in a separate agreement,that the German Company had no PE in India,that in view of the Indo-German DTAA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant as an asssessee in default under section 201 of the Act by treating 10 percent of the consideration paid for the purchase of the cranes from ZPMC . China to be taxable in India, without appreciating that the appellant did not have a Permanent Establishment in India and also that the said sum could not be treated as Fees for Technical Services both under Section 9(1 )(vii) of the Act and under Article 12 of the India - China DTAA. Payments made by ZPMC to APM Terminals BV, Netherlands (APMT) treated as indirect payment made by the Appellant on which was is required to be withheld. 3. On fact and in the circumstances of the case and in law. the learned CIT(A) has erred in upholding the action of the AO in treating the appellant to be an assessee in default under section 201 of the Act in respect of payments made by ZPMC to APMT as Fees for technical services / Royalty under the India - China / India - Netherlands DTAA. Assessee is a resident Indian company in terms of section 6 of the Act and is in the business of developing,constructing,operating and maintaining the port on a Build Own Operate Transfer (BOOT)basis.It had made certain payments to non-re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to section 9(2)of the Act and as explained in CBDT Circular,dated 12-3-2008,that the source of income was business of assessee in India,that services were utilised by assessee in India,that the services of Liftech were not related to assessee's business outside India,that the payee was resident of India,that the consultancy services of Liftech fell under FTS as per provisions of the Act,that the amount paid by the assessee was for the development and transfer of technical plan or technical design and therefore was covered as Fees for included services(FIS) under the second limb of Article 12(4) (b) of the India-USA DTAA,that such services might also fall under 'Royalty' under the India-USA DTAA as those involved imparting of information concerning their industrial commercial or scientific experience in the field of quality checking of cranes,that the activity would fall under royalty under Article 12(3)(a)of DTAA,that ZPMC had PE in India under Article 5(2)(j) of India-China Tax Treaty,that for the purpose of the said Article the period of project should include the period of installation and commissioning as well as the period for providing after sales services whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases of CESC Ltd.(87ITD653)and Diamond Services International P. Ltd.(304 ITR 201),Worley Parsons Services Pte Ltd.(301 ITR 54),De Beers India Minerals P.Ltd (297 ITR 76-AT) Anapharma Inc.(305 ITR 394)and ICICI Bank Ltd.(20SOT453)and argued that such payment was in the nature of business income and in absence of PE of Liftech such payment could not be taxed in India,that the assessee's contract was not for the purpose of obtaining any know-how but to avail a commercial service pertaining to review of pre- determined designs and construction audit of cranes while they were being manufactured. The assessee further contended that UBC Balaji(UBCB)was sub-contracted by ZPMC in the work relating to the installation and commissioning of cranes,that UBCB did not render services exclusively to ZPMC,that it provided similar services to other parties as well,that UBCB was not having an authority to conclude contracts on behalf of a ZPMC,that the question of ZPMC constituting Agency-PE in India under Article 5(4) of India-China DTAA did not arise,that by merely selling the cranes to appellant in India under supply contracts ZPMC did not automatically created its PE in India,that the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the aggregate stay of the employees of ZPMC during the contract period was not more than 177 days(78+ 99 days),that 78 days were spent during installation period i.e. from 30.10. 2007 to 15. 01.2008 and 99 days were spent for the purpose of carrying out 'after sales service' (i.e. from 16.01.2008to 15.07.2008), that for the period of 24.03.2008 to 15.06.2008 none of the employees of ZPMC were present in India,that the period of stay of employees of ZPMC in India under the contractual obligation had not exceeded the threshold limit of 183 days as per the Article 5(2)(j) of the India-China DTAA.It was further argued that the CBDT instruction was applicable for AY.1987-88 and that the instruction was not applicable in case of DTAA.It placed reliance on the cases of Andhra Pradesh Power Generation Corporation Ltd.(2009-TIOL-346-ITAT-HYD), Sundwiger EMFG and Co and others (2003-TIOL-273-HC-AP-IT),LG Cable Ltd.(314 ITR 301)and Xelo Pty Ltd.of Mumbai Tribunal(ITA/4107 and 4108).The assessee also referred the Protocol to the India-US DTAA,which contained example as similar to very facts of the assessee,the facts that technical skills were required by the performer of the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those information so that it could apply the same without any permission from Liftech,that Liftech got their part of contract executed through sub-contractor Leader which was resident of China,that the Reports of the Chinese sub-contractor were collected by Liftech through internet and were forwarded to assessee as well as to ZMPC,that the imparting of any information concerning technical/ Industrial/commercial/ scientific experience would fall under as royalty under Article 12(3)(c) of India-USA DTAA. 3.2. The FAA referred to the Acceptance Certificate and held that MPA was a composite contract,that it determined the purchase price and envisaged that it was the Seller s responsibility to fabricate cranes,that the artificially bifurcated contracts(i.e. Specific Purchase Contract and Services contract after sales and service)were nothing but part of MPA dated 17-2-2004 and 17- 6-2004,that purchase consideration passed on to ZPMC was for turnkey contract as per the clause 21 of MPA,that the activities rendered by ZPMC in India were in the nature of managerial, technical and consultancy services in respect of labour,equipment and material cost associated with supply of cranes in I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the assessee clearly confirmed that the value of after sales and support services was included in sale consideration of the contract,that ZPMC had only considered cost of its employees and had not considered any other services, that UBCB had performed activity on behalf of the appellant,that UBCB constituted agency PE under Article 5(4) of DTAA,that the element of FTS was taxable in India even without there being no PE of the ZPMC in India,that the payer was Indian resident,that the payment made on account of technical,managerial services was taxable u/s.9(1 ) (vii)(b) read with explanation 2 of the Act.The FAA referred to the para2(6) of attachment I-A of design and Structural agreement.He analysed the provisions of Article12(4)(b) of the DTAA and held that the payment for rendering any technical or consultancy service was FIS,that the payment made by the assessee was for development and transfer of a technical plan or technical design,that the words 'make available meant technical know-how, experience,skill,know-how or process etc.,that it did not go withconstraints of the development and transfer of a technical plan or a technical design ,that the second limb in clause( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d.(53taxmann. com1) and further argued that the assessee had entered into two separate service contracts in the months of May and December 2006 in respect of unloading, installing, commissioning and testing in connection with the purchase of cranes in pursuance of specific purchase agreements, that nothing was attributable from the purchase contracts towards services, that in respect of services the assessee had deducted tax @10%, that the services alleged by the AO to be part of purchase contract were in fact separately covered by the service contracts, that if services were inextricably linked to supply of goods same could not be treated as FIS/FTS, that the services would be part of business income.He referred to Article-5(2)(j) of India-China DTAA,that where there was a specific PE Clause the provisions of Article 12 were not applicable,that activity of supply, installation and commissioning and after sales services independently did not amount to FTS.The Departmental Representative (DR)supported the order of the FAA and argued that employees of the Chinese company stayed for more than the stipulated period in India,that the assessee had installation PE in India, that the servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to deduct tax for the payments made to Liftech.Here,one more thing has to be considered-the assessee had availed a commercial service pertaining to review of pre-determined designs and construction audit of cranes while they were being manufactured.In other words,Lifetech had provided any know-how to the assessee for manufacturing of cranes.A plain reading of the Protocol to the Indo-US DTAA and the example cited in it leave no doubt that the services rendered by Liftech were not technical services within the meaning of Article 12(4)(b)/12(7)of the treaty.As far as CBDT instruction is concerned it is found that it deals with carrying on business of oil exploration and production in India.In our opinion,the Instruction is of use to decide the issue before us.Here,we would like to refer to the case of Diamond Services International (P)Ltd.(304ITR 201).Facts the case were that Gemological Institute of America (GIA) was engaged in the activity of grading and certification of diamonds which were shipped to its laboratory through an international network of participants,that Grading report issued by GIA was a statement of fact as to the characteristics of the diamond,that it included ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereof by GIA did not fall within the expression royalty.In light of above discussion and respectfully following the judgment of Diamond Services International (P)Ltd. (supra),we reverse the order of the FAA.We hold that the payment made to Liftech was not royalty or FIS or FTS and the assessee was not supposed to deduct tax at source for making the payment to Lifetech and therefore cannot be treated as assessee in default.Ground no.1 is decided in favour of the assessee. 5.1. Now,we would like to discuss the issues raised in grounds no.2 3.The FAA had upheld the decision of the AO that part of the basic installment and purchase agreement included element of service contract also,that the job done under the basic agreement could be termed FIS.The FAA had also held that the assessee had PE/Installation PE in India,as the the employees of the non - resident company stayed in India for more than 180 days.In our opinion,there was no justification in holding that the services provided under the basic agreement were akin to services rendered by specific services agreement-rather they were part and parcel of the service contracts dt.26.5.06 and 9.12.2006.We also find that the projec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain foreign remittances without deducting tax at source.When assessee was asked the reasons of doing so, it was explained to the AO-TDS that the income embedded in these payments was not chargeable to tax in India as these payments were for imports of plant, equipment and machinery. It was also contended that as the payments were made for purchases, which did not give rise to taxability of related income in India, there was no requirement of tax withholding requirement from these payments. The AO-TDS, however, did not share this perception of facts. He was of the view that the payment was not only for purchases but also for incidental services in connection with installation and commissioning of these machines, and, accordingly, the assessee was required to deduct tax at source from these payments. He was also of the view that even if a part of income included in these payments was liable to be taxed in India, it was incumbent upon the assessee to approach the Assessing Officer, under section 195(2), for determination of income in respect of which tax is to be deducted at source. The AO-TDS noted that these payments were admittedly for composite contracts which includes all the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of goods as also the related services for installation and commissioning etc. ........ It was submitted that whenever any services rendered by the vendors for the purposes of installation, commission and supervision services, taxes are duly deducted from the same, and that so far as these payments before us are concerned, these payments are simply for purchase of machines, and plant and machinery. It was also pointed out that the revenue s case before us is not that taxes have not been deducted from the payments for installation, commissioning and supervision charges, but that a part of the payment for machines, plant and machinery represents payment of consideration for services rendered in India as there is no separate consideration, save and except for nominal reimbursement of actual costs and allowances of technical personnel visiting the installation site, for services rendered in India. According to learned Departmental Representative, as long as vendor is associated with any work, or its supervision, to be carried out in India and no separate consideration is paid for the same, the sale consideration for such machine, plant and machinery must be held to h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivities in connection therewith cross the specified threshold time limit,..... There is nothing on record to establish, or even suggest, that this condition is satisfied in the cases before us. ....In our considered view,therefore, it is plain on principle that as long as threshold time limit for PE is not satisfied,the consideration for such installation or assembly activities, or supervisory activities in connection therewith, cannot be brought to tax in the source country. During the course of hearing and at the instance of the bench, learned counsel for the assessee has filed details of the work carried on at the installation and assembly site in respect of all the transactions, as it did take place in the relevant financial period, and, as evident from even a cursory look at these details, in none of these cases the conditions for creation of PE are satisfied. ....In view of the above discussions, even if a part of the income, embedded in the impugned payments made to non-resident vendors, can indeed be attributed to the installation, assembly or commissioning activities of the plant, machinery or equipment purchased, such an income, on the facts of this case, cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vendors are in the nature of business income, and the deeming fiction, as sought to be canvassed by the revenue, has no application in the matter. The business income can be taxed under article 7 read with article 5, and, as we have seen earlier in this order, the conditions precedent for taxability under article 7 r.w.a. 5 are not fulfilled on the facts of this case. In many of the cases, as noted in the orders of the authorities below, the related installation and commissioning services, and supervision services in connection therewith, have been rendered by the domestic entities and payments made to those entities have already been subjected to tax withholding under other provisions of chapter XVII D but, disregarding this reality, the CIT(A) has proceeded on the basis that cost of services is also vested in the cost of material whether such services are performed or not. When admittedly no such services were rendered, there not have been any occasion to bring fictional consideration for those services to tax. 58. In view of the above discussions, in our considered view, under the scheme of allocation of taxing rights under the related tax treaties,India does no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es so provided by the assessee fall within the scope of 'managerial, technical or consultancy services' as per Explanation 2 to section 9(1)(vii). 8.It is observed that the assessee performed freight and logistics services outside India in respect of consignments originating from India undertaken to be delivered by Menlo India. The role of the assessee in the entire transaction was to perform only the destination services outside India by unloading and loading of consignment, custom clearance and transportation to the ultimate customer. It is too much to categorize such restricted services as managerial services. The Bench, therefore, jettisons this contention raised on behalf of the Revenue. 9.The nature of services, being freight and logistics services provided by the assessee to Menlo India has not been disputed by the authorities below. There is nothing like giving any consultation worth the name. Rather such payment is wholly and exclusively for the execution in the shape of transport, procurement, customs clearance, delivery, warehousing and picking up services. That being the position, payment in lieu of freight and logistics services cannot be ranked as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat he held that services were embedded in the purchase agreement,that the assessee had deducted tax @10% in respect of the services enumerated in the service contract,that the AO and the FAA have held certain services rendered in pursuance of service contract were part of the purchase contract and hence the assessee was liable to deduct tax with regard to such services.In our opinion,it would be useful to refer to the pages 488-92,505-06 of the Paper book(PB)in that regard.Scope of services has been defined as under: The services means the following a. Removal of sea fastening, reinstallation of the disk assembled parts of the cranes removed for sea transportation (if any); b. unloading the cranes from the ship to terminal s wharf c. placement of the cranes on their permanent rail d. poking up the claim to the electric power e. testing all functionalities of the cranes on their proper operations f. preparing the crane four, shall operations according to the operating criteria of the terminal g. removing all defects that may be observed occur to during or through the above h. training the terminal operations and mechanical staff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendered as per the purchase agreement cannot be considered part of the above mentioned two Service Contracts,as held earlier. 5.4. Now,we would like to take up the issue of SPC dated 29.10.2005(Pg.464-471 of the PB).If the services rendered by the supplier are examined it becomes clear that such services are inextricably connected to the sales of cranes.We want to clarify that it is true for other SPC.s. also.Settled law,governing such contracts,stipulate that if services are intrinsically connected to the sale of goods same cannot be treated as FIS or FTS and they would constitute part of business income.The Hon ble Apex Court in the case of Ishikawajma Harima Heavy Industries Ltd.(288ITR408)has upheld the above principle.The Hon ble Calcutta High Court in the matter of Andrew Yule Co.(207ITR899)has also dealt with the identical issue.In that matter a German Company had supplied certain machinery to the Indian assesee and had rendered certain services in setting up of the machinery.Considering those facts,the Hon ble Court held that services rendered in setting up of machine could not be treated as personal service even if the agreement for rendering the services was embodi ..... 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