2005 (8) TMI 670 - AAR - Income Tax

AAR/612/2003 Whether in terms of contract RS-1 between DMRC and the consortium, the lump sum price for the works of design, manufacture, supply, testing and commissioning of passenger rolling stock of the Mass Rapid Transport System includes element of fee for technical services as defined in article 13(4) of the Treaty between India and Korea? Whether it would not be incorrect to disintegrate the contract for purposes of taxation of each of the component? Whether the proportion of the lump sum price payable by the DMRC under contract-RS-1-as mentioned against costs centre, G and J can be regarded as fee for technical services? Whether Fee for technical services cannot be taxed as business profits under article 7 in view of the fact that the FTS is specifically dealt with in article 13(4) of the Treaty? AAR/613/2003 on Whether in terms of contract-RS-1-between the DMRC and the consortium, the lump sum price for the works of design, manufacture, supply, testing and commissioning of passenger rolling stock of the Mass Rapid Transport System includes element of fee for technical services as defined in article 12(4) of the Treaty between India and Japan. Whether it would not be incorrect to disintegrate the contract for purposes of taxation of each of the component? Whether the proportion of the lump sum price payable by the DMRC under contract-RS-1-as mentioned against costs centre, G and J can be regarded as fee for technical services? Whether Fee for technical services cannot be taxed as business profits under article 7 in view of the fact that the FTS is specifically dealt with in article 12(4) of the Treaty.

Issues Involved:
1. Whether the lump sum price in contract RS 1 includes any element of fee for technical services (FTS).
2. If affirmative, what proportion of the lump sum price can be regarded as FTS.
3. Whether FTS, if any, arises through a permanent establishment in India and is taxable as business profits.

Detailed Analysis:

Issue 1: Inclusion of Fee for Technical Services (FTS) in Lump Sum Price
The applicants, M/s. Rotem Company and M/s. Mitsubishi Corporation, argued that contract RS 1 for the design, manufacture, supply, testing, and commissioning of passenger rolling stock for the Delhi Metro does not include any element of FTS as defined in the Double Taxation Avoidance Agreements (DTAA) between India and Korea (Treaty I) and India and Japan (Treaty II). They contended that RS 1 is a composite contract for sale and supply, not for rendering services, and no part of the lump sum price should be regarded as FTS.

The Commissioner, however, argued that RS 1 is not an ordinary supply contract but a composite one that includes technical services. The pricing schedule disintegrates the lump sum price into various cost centers and milestones, some of which pertain to technical services.

The Authority concluded that RS 1, being a composite contract, can indeed be segregated into its elements. It was found that cost centers "A", "B", "G", and "J" involve services that fall within the definition of FTS under articles 13/12 of Treaties I and II. The services in cost centers "A" and "B" are inextricably linked to the primary objective of the contract and do not constitute FTS. However, services under cost centers "G" (training) and "J" (supervision of maintenance) are separate and independent, thus qualifying as FTS.

Issue 2: Proportion of Lump Sum Price as FTS
The Authority determined that the proportion of the lump sum price related to cost centers "G" and "J" can be regarded as FTS. These cost centers specifically pertain to training and supervision services, which are independent of the design, manufacture, and supply of metro trains.

Issue 3: Taxation of FTS as Business Profits
The Authority ruled that FTS cannot be taxed as business profits under article 7 of the DTAAs because FTS is specifically dealt with in articles 13/12 of the respective treaties. Therefore, the provisions of article 7 do not apply to FTS.

Ruling Summary:
- AAR/612/2003 (India-Korea DTAA)
- Question 1: The lump sum price includes an element of FTS as defined in article 13(4) of the Treaty between India and Korea.
- Question 2: The proportion of the lump sum price related to cost centers "G" and "J" can be regarded as FTS.
- Question 3: FTS cannot be taxed as business profits under article 7 due to its specific treatment under article 13(4).

- AAR/613/2003 (India-Japan DTAA)
- Question 1: The lump sum price includes an element of FTS as defined in article 12(4) of the Treaty between India and Japan.
- Question 2: The proportion of the lump sum price related to cost centers "G" and "J" can be regarded as FTS.
- Question 3: FTS cannot be taxed as business profits under article 7 due to its specific treatment under article 12(4).

This ruling clarifies that composite contracts can be disintegrated for tax purposes and that specific elements of such contracts can be identified as FTS, subject to taxation under the relevant articles of the DTAA.

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