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2016 (4) TMI 590 - ITAT MUMBAI

2016 (4) TMI 590 - ITAT MUMBAI - TMI - TDS u/s 195 - payments to non-resident entities - Taxability in India - withholding tax - payments made to Liftech as Royalty / Fees for Technical Services under Article12(3)(a) /12(4) of the India-USA Double Tax Avoidance Agreement ('DTAA') - Held that:- The definition of royalty under the DTAA under art. 12(3) useed the expression "or for information concerning industrial, commercial or scientific experience",that there was no parting of information conce .....

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parting its technical knowledge, experience, skill, etc. to its customers,that when there was no transfer of right 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 Internat .....

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ob 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 no income had accrued in India,that there was no liability to deduct tax source.Finally,we would like to refer to the order of the Special Bench of the Chennai Tribuanl,delivered in .....

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had no authority to conclude any contract on behalf of ZPMC,that it had rendered services relating to the installation and commissioning of crane not only to assessee but to other parties also.Therefore, in our opinion there was no agency PE in India under Article-5(4) of the India China DTAA of the non-resident entity-i.e. ZPMC. - Decided in favour of the assessee. - ITA No.7878/Mum/2010, - Dated:- 23-3-2016 - Sh. Rajendra,Accountant Member & Ram Lal Negi,Judicial Member For The Assessee : .....

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as erred on facts and in law in upholding the order of the AO, treating the Appellant as an "assessee in default" under section 201 of the Income-tax Act, 1961 ('the Act') by treating the payments made to Liftech as Royalty / Fees for Technical Services under Article12(3)(a) /12(4), respectively of the India-USA Double Tax Avoidance Agreement ('DTAA'), Payment made to Shanghai Zhenhua Port Machinery Co Ltd, China ('ZPMC') for purchase of cranes treated as taxabl .....

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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 secti .....

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08,held that it had failed to deduct tax from income chargeable to tax in India from payments made to non-residents. Brief facts: 2.During the assessment proceedings,the AO found that the assessee is an affiliate to M.s A.P. Moller Maersk A/S(APMM),a global group,that the APMM had entered in to a Main Purchase Agreement(MPA),dated 17-2-2004 with Shanghai Zhenhua Port Machinery Co.Ltd.,China (ZPMC)for supply of cranes to its affiliates for a total consideration of USD 3,83,00,000,that consequent .....

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ree Rail Mounted Quay Cranes(USD$1,68,00, 000)and one Q-Eeo Rubber Tired Gantry Crane(USD $1, 21,00,000),that in addition to the above contracts,the assessee had also entered into two service contracts amounting to USD 11,00,000 with ZPMC for installation and commissioning services certain cranes,that the assessee had claimed that all the above agreements for purchase of cranes were based on the MPA entered in between the group company of APMM and ZPMC,that all the above cranes were to be manufa .....

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ervice-Agreement,dtd.3-7-2006 and held that the services performed by Liftech were technical/consultancy and managerial,that same were utilised in assessee's business being carried on in India,that the payment was chargeable as Fees for technical Services(FTS)as per explanation 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 wer .....

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s 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 which was six months fro .....

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ing tax from such payments.As a result, a demand of ₹ 4,53, 751/-including interest under Section 201(1A),was raised.The AO,while calculating amount attributable for services performed in India,relied on the Instruction No. 1767,dtd.01.07.1987, issued by the CBDT. 3. Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority(FAA)and submitted that Liftech was appointed purely to review the designs and construction audit of cranes and to monitor t .....

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transfer of technical plan/technical design developed by Liftech to assessee,that the services rendered by Liftech did not fall under the ambit of development and transfer of a technical plan/technical design,that such services did not also fall within the definition of FIS under India-US DTAA,that all these services were rendered in USA and in China i.e. out of India,that no employees of Liftech visited in India to render these services to assessee,that it had made an arm's length agreement .....

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.(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 assesse .....

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er supply contracts ZPMC did not automatically created its PE in India,that the cranes were fabricated outside India and they were bought and procured from outside India,that the installation and commissioning of cranes was carried out in India,that separate service contracts were entered in to in that regard,that tax had been deducted on such service contracts,that the total period of stay of employees and other personnel of ZPMC in India in connection with installation and commissioning of cra .....

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3.2008 to 15.06.2008 when none of these employees were present in India) for the purpose of carrying out 'after sales service'was actually only 99 days,that the stay was less than the the threshold limit of 183 days,that ZPMC would not constitute a PE in India under Article 5 of India-China tax treaty,that the AO had erred in calculating the period of stay of employees of ZPMC in India, that the AO had inadvertently calculated the number of days from 30.10.2007 to 15.01 2008 as 93 days,t .....

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ss solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character,that the main business activity of the ZPMC with regard to the purchase contracts with the assessee was supply of machinery,that after sales service is just an additional support to it to rectify any problems if any that could arise after commissioning the cranes. Without prejudice to the above contention,the assessee made an alternate submission and stated that the aggregate .....

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t 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 re .....

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t ZPMC had to construct,deliver and commission the cranes in accordance of terms and conditions set out in MPA,that the cranes were to be fabricated,delivered and commissioned by ZPMC for the assessee being one of the affiliate of APMM,that the assessee entered into MPA for buying other cranes that the terms and conditions of subsequent MPA(dtd.17-06-04) were similar to the MPA dated 17-2-2004,that the assessee had entered in to Crane Advisory Services Agreement (CASA)with Liftech,that in common .....

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that it was providing services of development of plan and design, model which amounts to fees for technical services and also covered as fees for included services defined under Article 12(4)(b) of DTAA.Reffering to the fee estimate clause,he observed that it also included fees for commissioning at Pipavav and documentation,that the services were also rendered in India,that the Liftech had awarded sub-contract to Leader but what kind of services were rendered by Leader to the assessee was not ma .....

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aspects in the construction activity of cranes and the assessee had got 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 .....

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ed 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 India,that technical services in respect of equipment and commissioning of spare party in India were also in nature of technical and consultancy,that the activities included construction of cranes in China involving material and othe .....

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eration on account of technical services and business consideration,that income from such activities was liable to charge in India under section 5(2) of the Act,that contract of sales consideration also included cost of labour,equipment and material cost with supply of cranes,that the AO had rightly held that a part of income was liable to be taxed in India on account of service part of supply contract in addition to services contract. 3.3. He further held that for the purpose of constituting th .....

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able in India,that some of the activity provided in purchase contract were done in India,that the nature of services clearly pointed out that they were managerial,technical and consultancy services in respect of labour, equipment and material cost,that there was an element of FTS in the purchase contract of cranes,that same were intrinsically woven in the after sales and service and spare parts/utilities,that ZPMC had been paid fees for FTS for the provisions of services other than sale of crane .....

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e 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 .....

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ltancy services and if such services consisted of the development and transfer of a technical plan of a technical design also,that the condition of making available technical knowledge was not sin qua non for considering the question as to whether the amount if FIS or not,that it was rightly considered as FIS within the meaning of Article 12(4)of the DTAA.He relied upon the cases of Zentex Merchants(P)Ltd.(94ITD 211),SNC-Lavalin International Inc. (13DTR449),Tata Iron and Steel Co.Ltd(34SOT83)an .....

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ed as make available services.Finally,he held that the payment made to Liftech by the assessee was in the nature of FIS chargeable to tax in India under section 9(1)(vii)(b) and under 12(4)(b) read with Article 12(7) of the DTAA. 4. Before us,the Authorised Representative(AR)contended that assessee had purchased cranes from ZMPC,that the non-resident company had no PE in India including agency PE, that the employees of the Chinese company had not stayed in India for more than 182 days, that for .....

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outside India, that the AO and the FAA were not justified in holding that it was development of design,that no services were made available to the assessee .He relied upon the cases of J.Ray McDermott Eastern Hemisphere Ltd.(130 TTJ121), Birla Corporation Ltd.(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 .....

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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 services availed by the assessee were in the na .....

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Liftech a USA based entity for rendering of engineering services to review of predetermined design and construction audit,that Liftech got their part of contract executed through a sub-contractor namely Leader which was a resident of China,that the assessee paid ₹ 92.19 lakhs to Liftech for the services availed,that ZPMC had arranged for transport of cranes to the designated site,that it had provided installation and commissioning services of the cranes that it also provided after sales se .....

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oyalty as per the India American tax treaty or as per the provisions of section 9 of the Act. We find that all the services related with audit and construction of cranes were availed out of India,that Liftech had appointed Leader its sub-contractor,that the assessee was not party to that contract.Therefore,in our opinion,there was not any transfer of technical plan/design by Liftech to assessee and that nothing was made available to the assessee in India.Once it is held that provisions of Articl .....

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eview 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 busi .....

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characteristics of the diamond,that it included an analysis of the diamond s dimensions, clarity, colour, polish, symmetry and other characteristics,that GIA did not assign or transfer any industrial or commercial experience to its customers,that the AO had held that services rendered by GIA were in the nature of Royalty and that tax had to be deducted by the assesses before making payment to GIA.The Hon ble Bombay High Court, deciding the matter in favour of the assessee,held that there was no .....

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arty making payment with any right as regards the use of the cumulated experience of GIA,that the payment in question did not involve a payment for the use or the right to use the industrial, commercial or scientific experience of GIA,that the activity of grading or certification was merely the application of the knowledge/ experience in a professional stream,that the definition of royalty under the DTAA under art. 12(3) useed the expression "or for information concerning industrial, commer .....

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cquiring the service to apply the technology contained therein,that GIA was not imparting its technical knowledge, experience, skill, etc. to its customers,that when there was no transfer of right 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 ex .....

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o.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 ser .....

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ice for computing the threshold limit of the stay.If the actual period of after sales service is excluded from the total period then the stay of the employees of ZMPC would be less than 183 days,there would not be any PE of ZPMC in India as per Article- 5(2)(j) of the DTAA.Here,we would like to refer to the case of J.A.McDermott Eastern Hemisphere Ltd.(130 TTJ 121) and Kreuz Subsea Pte.Ltd.(58taxmann.com371).In the second matter the one of the issues before the Tribunal was to determine the meth .....

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that actual number of days of the employees of ZMPC were less than 183 days. 5.2.We will also like to discuss the issue of installation PE from another angle.The basic principle,in this regard,lays down the rule that when there is a specific PE clause in relation to a particular type of service(construction/installation/assembly)and where such services are also covered within the scope of Article 12,the provisions of that Article will not be applicable.In the case of Birla Corporation Ltd.(53 ta .....

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DS in short)noticed that the assessee has made 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 .....

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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 services and other charges and that contracts entered into by the ….... (assessee) for design, manufacture, supply, installation, testing and commissioning of plant would fall under the category of works contracts and leviability of TDS thereon .....

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e payments inherent in the nature of services along with each supply type of payments . He was of the view that it was duty of the assessee to approach the income tax authorities for apportionment of taxable/non-taxable part of any remittance made to the foreign parties but it (the assessee) failed to do so . The AO-TDS once again noted that the orders of supply are not mere supply orders and that there are also some traits/ inherent clauses which connote that the order is of composite nature as .....

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f plant and machinery and also for ancillary services of installation, commission Assessment years 2010-11 and 2011-12 Page 6 of 51 and erection of such plant and machinery. ….....Learned CIT(A) then analyzed each of the purchase contract and noted that even though there is a mention about reimbursement of certain expenses and related per diem payments in the contracts, for visits in connection with the installation and commissioning, each of these contracts puts the vendors under certain .....

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r 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 t .....

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hat the basic plea of the Assessing Officer, based on which the impugned demands have been raised, is that since a part of consideration paid for the equipment and machinery is towards installation, commissioning or assembly of plant and equipment, such a consideration is liable to tax in India under section 4 and 5 of the Income Tax Act, 1961. XXXXXXXXXXXX We have noted that so far as the transactions impugned in these appeals are concerned, these transactions pertain to the vendors fiscally do .....

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vendor carries on business in India through a permanent establishment in India, and where the non-resident vendor carried on business through the permanent establishment, taxability of income shall be confined, except in the cases in which limited force of attraction principle is specifically extended in article 7(1) i.e. Belgium, Germany and US, to the income as is attributable to that permanent establishment. …. The case of existence of the PE thus hinges on whether by the virtue of, wh .....

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y) continue for a period of more than 188 days; … .......The underlying principle in all the above definition, even as there is a variance on the threshold time limits, is that unless the installation or assembly project or supervisory activities 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 princip .....

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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, cannot be brought to tax as business income under article 7 read with .....

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aties. Generally speaking, and de hors the restricted meanings assigned by make available clause or exclusion clauses, installation or commission activities are a particular type of technical services. There is thus a general provision for rendering of technical services and a specific provision for rendering of technical services in the nature of construction, installation or project or supervisory services in connection therewith. 47. The same principle must apply in the treaty situations as w .....

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a situation in which there are specific PE clauses in relation to a particular type of services, which are covered in the scope of servi ces covered by the scope of the fees for technical services or fees for included services , the taxability of consideration for such services must remain confined to taxability of profits under the relevant specific PE clause. In our humble understanding, the provisions for taxability as FTS or FIS will not come into play in such cases. ........Viewed thus, the .....

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ad 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 .....

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t to tax income, even if any, in respect of rendition of installation, commissioning or assembly services, embedded in the invoice value of the related equipment, plant or machinery. Considering the above decision,we are also of the opinion that FAA was not justified in holding that a part of income was liable to be taxed in India on account of service part of supply contract in addition to services contract,that services rendered in respect of installation/commissioning or assembly services wer .....

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tics services to each other,that each party agreed to render services to the other in respect of import and export of consignments,that income arising under the agreement was claimed by the assessee to be not chargeable to tax in India as per the provisions of section 5 read with section 9 of the Act,that the AO held that services were covered under the provisions of section 9(1)(vii), being FTS,that the FAA upheld the order of the AO stating that the transportation fees received by the assessee .....

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sessee as 'fees for technical services' coming with in the sweep of "managerial, technical or consultancy services". On the contrary, the contention of the assessee has remained before the authorities below as well as us that the such services do not fall within the ambit of any of the categories taken note of by the authorities below. Tribunal will examine as to whether the services so provided by the assessee fall within the scope of 'managerial, technical or consultancy .....

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rvices 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 .....

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Tribunal fails to appreciate as to how this clause 2 makes the services provided by the assessee as "technical". Rather clause 2 mandates to execute a separate Technology and Software license agreement for the provision of computer equipment and software. How is it that the consideration for the services can be attributed to a proposed agreement, which has yet to see the light of the day. 17.Thus it can be noticed that the payment made to the assessee in question is not a consideration .....

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ven been disputed by the learned Departmental Representative, then there can be no question of roping such income within the ken of section 9(1)(i). 19.It is, therefore, patent that the payment received by the assessee neither falls u/s 9(1)(i) nor u/s 9(1)(vii). Since the income cannot be described as deemed to accrue or arise in India and there is no doubt about such income having not been received or deemed to be received or accruing or arising in India, the taxability of such income fails. T .....

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ces 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 .....

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l defects that may be observed occur to during or through the above h. training the terminal operations and mechanical staff in operating and maintenance and fault finding i. handing over the crane in the required state to the terminal to proceed with, shall operations j. bank guarantee, custom duties and custom clearance charges on temporary import of tools and tackles required for election and installation of cranes k. all this election insurance policy and insurance for ZP MC s personal for t .....

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Terminal will be the owner of the cranes. ZPMC has offered to the terminal the provision of services of unloading, installation, commissioning trial tests of the cranes and training of terminal s personnel as set out in clause (the services) at the site. The Terminal has agreed to place an order and pay for the services from ZPMC. Now,therefore,the Terminal has agreed to hire the aforesaid services from ZPMC and said ZP MC has agreed to provide the services to the terminal in relation to the cra .....

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opinion that services to be availed by the assessee under the above mentioned two agreements were in nature of taxable-service and the assessee had deducted tax at source for such services.The assessee had entered in to separate specific purchase agreement. Article 7 of the said agreement (pg.467of the PB.)deals with after sales service and spare parts and the next clause is about project schedule.In our opinion,both the agreement deal with separate things and services rendered as per the purch .....

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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 fac .....

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