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2012 (6) TMI 18 - AAR - Income TaxDTAA between India & USA - contract for repair and overhauling services of turbines - whether Fees for Technical Services(FTS) - assessee (USA company) in addition to contract for supply and installation of turbines had entered into yet another contract for repair and overhaul services of the turbines - scope of work included inspection and boroscoping periodically - liability for withholding taxes - Held that - Portion of the consideration must be assigned to the inspection and the boroscoping activity that takes place in India and part of the amount has to be ascribed to the modifications incorporated by the applicant in respect of which it grants a non-exclusive license to ONGC for its own use directly or through its contractors. Those parts of the receipts attributable to inspection and boroscoping activity carried on at the site in Mumbai though arise in India are not taxable as included services under Article 12 of the DTAC, but if the applicant is found to have a permanent establishment in India, taxable as its business income, but that part of the receipts attributable to the services rendered in modifications and replacement of parts covered by engineering, designs, data and specifications delivered to ONGC in terms of the contract, are taxable as included services in India under Article 12 of the DTAC between India and USA as provided for therein. Therefore, payments are not taxable under the Income-tax Act, but only under the DTAC between India and USA. Also, tax has to be withheld u/s 195 on that part of the apportioned payment.
Issues Involved:
1. Taxability of receipts under the contract for overhauling services as Fees for Technical Services (FTS) in India. 2. Classification of consideration under the contract within the definition of Fees for Included Services under Article 12 of the Indo-US Double Taxation Avoidance Agreement (DTAA). 3. Liability of the consideration to withholding taxes in India under section 195 of the Income-tax Act. Detailed Analysis: 1. Taxability of Receipts as Fees for Technical Services (FTS): The applicant, a US-based company with a branch in Singapore, entered into a contract with ONGC for overhauling and repairing turbines. The Revenue argued that the questions posed were pending before the Income-tax Authority, thus barring the application under section 245R(2) of the Income-tax Act. However, the Authority accepted the applicant's submission that the questions arose from a new contract dated 14.09.2009, not pending before any authority, allowing the application. The applicant contended that the receipts for overhauling services fall within the category of technical services under section 9(1) of the Income-tax Act. Despite having no business connection or Permanent Establishment (PE) in India, the receipts would be deemed to accrue or arise in India and taxable as FTS under clause (vii) of section 9(1). However, the applicant claimed the benefit of the Indo-US DTAA, arguing that the services did not make available any technical knowledge, thus not taxable in India as fees for included services. 2. Classification under Article 12 of Indo-US DTAA: The Revenue argued that the contract for overhauling services was part of an integrated package, including supply, installation, and maintenance, thus taxable in India. The applicant's obligation to provide detailed drawings and data to ONGC, granting a royalty-free, non-exclusive license for internal use, indicated making available technical services. Therefore, the fees for included services were taxable in India under Article 12 of the DTAA. The Authority noted that most activities, except inspection and boroscoping, occurred in the USA. The contract involved overhauling turbines without making available any technical knowledge or process enabling ONGC to use that knowledge independently. However, clause 38 of the agreement, providing engineering designs and data, constituted making available technical services. Thus, a portion of the consideration for modifications and replacement parts was taxable as included services under Article 12 of the DTAA. 3. Liability to Withholding Taxes under Section 195: The Authority concluded that the portion of consideration attributable to inspection and boroscoping in India was FTS under the Income-tax Act but not included services under Article 12 of the DTAA. However, the portion related to modifications and replacement parts, making available technical knowledge to ONGC, was taxable as included services in India under Article 12 of the DTAA. Accordingly, the ruling stated that payments were not taxable under the Income-tax Act but under the DTAA between India and the USA. For the portion of the payment attributable to modifications and replacement parts, tax must be withheld under section 195 of the Act. Conclusion: - Question 1: Payments are not taxable under the Income-tax Act but under the DTAA between India and the USA. - Question 2: Receipts for inspection and boroscoping are not taxable as included services under Article 12 of the DTAA, but modifications and replacement parts are taxable as included services. - Question 3: Tax must be withheld under section 195 for the portion of the payment related to modifications and replacement parts. The ruling was pronounced on May 30, 2012.
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