2012 (8) TMI 746 - AAR - Income Tax

India Netherlands DTTA - contract for supply of machinery, spare and wearing parts and technical documentation - chargeable to tax u/s 195 of Income-tax Act, 1961 OR as per Article 12 para 5 read with para 6.(a) of the DTAA - Held that - No dispute to the fact that the two contracts were entered into the same day and on going through them, it is clear that the contract was neither for sale of property simplicitor nor for erection and service connected therewith. It was really an indivisible contract for supply, erection, commissioning testing etc. of a project. The applicant and Grasim have chosen deliberately to split up the contract into two. The applicant, according to it, has taken advantage of the splitting up by adopting the stand that the consideration for supply is not chargeable to tax in India. The first contract was for the supply of machinery, spare and wearing parts and technical documentation for the production of Autoclaved Aerated Concrete and the applicant has agreed to undertake the design, engineering, supply and delivery of machinery, spare and wearing parts and technical documentation forming part of the Project . This cannot be taken to be a contract for the sale of property - rule on the question formulated that the transaction in question generates fees for technical services in the hands of the applicant and it does not come under the exception in paragraph 6(a) of Article 12 of the DTAC and that it is chargeable to tax in India - against assessee.

Summary

Issues:
1. Whether the payment under the contract for project services is chargeable to tax under section 195 of the Income-tax Act or as per the Double Taxation Avoidance Agreement (DTAA) with the Netherlands.

Analysis:
1. The applicant, a company claiming to be a resident of The Netherlands, approached the Authority seeking advance rulings on a contract with Grasim Industries Ltd. for supply of machinery and project services. The applicant argued that the withholding provision under section 195 of the Income-tax Act would not apply to the consideration received for project services as they are ancillary and linked to the sale of property.

2. The Authority allowed the application to rule on whether the payment under the contract for project services is taxable under section 195 of the Income-tax Act or the DTAA with the Netherlands. The applicant contended that the project services contract is part of the same transaction as the supply contract and falls under the exclusion in the DTAA.

3. The Revenue argued that the contracts were treated as separate by the parties, and the applicant cannot claim the project services were ancillary to the supply contract. The Authority noted that the contracts were for supply, erection, and commissioning of a project, and the splitting of contracts was an attempt to avoid tax liability.

4. It was established that the consideration under the project services contract was for technical services, and the splitting of the contracts was artificial. The Authority found that the splitting was a ruse to avoid tax, and the applicant cannot claim the services were ancillary to the sale of property.

5. The Authority concluded that the consideration received for the project services constitutes fees for technical services under the Income-tax Act and the DTAA. Therefore, the transaction is deemed chargeable to tax in India, as ruled by the Authority.