2013 (5) TMI 491 - AT - Income Tax

Royalty - FTS - Taxability of the amount of Euro paid by Gujarat Narmada Valley Fertilizers Company Ltd (GNFC) for technical documentation/engineering, etc to a denamrk company - AO and DRP not accepted the claim of the assessee regarding the non taxability - assessee is a leading chemical technology company in Denmark entered into an agreement with Gujarat Narmada Valley Fertilizers Company Ltd (GNFC) for supply of equipments along with associated materials as per the specific design and technical data. Held that - The authorities below have decided the issue by treating the payment as fee for technical services, however, the crucial fact of having two separate agreements for the year under consideration has not been considered and further the provisions of DTAA have also not been considered. Since decision in the case of Ishikawajma-Harima Heavy Industries Ltd (2007 (1) TMI 91 - SUPREME COURT) wherein held that for the purpose of taxability, the entire contract shall not be considered to be an integrated one so as to make the appellant to pay tax in India as well as the retrospective amendment in section 9 has not been considered in the earlier years, therefore, the issue has to be decided on the basis of the facts of the year under consideration. Since certain crucial aspects and facts have not examined by the authorities below therefore, in the interest of justice, remit this issue to the record of the AO for deciding the same after considering all the relevant facts as well as the decisions on the point.

Summary

Issues Involved:
1. Non-taxability of the amount received for technical documentation/engineering services.
2. Distinction between payments for technical services and supply of equipment.
3. Application of retrospective amendments to Section 9 of the Income Tax Act.
4. Relevance of the Double Taxation Avoidance Agreement (DTAA) between India and Denmark.
5. Consideration of the Supreme Court's decision in Ishikawajma-Harima Heavy Industries Ltd vs Director of Income Tax.

Detailed Analysis:

1. Non-taxability of the Amount Received for Technical Documentation/Engineering Services:
The assessee, a Danish chemical technology company, argued that the amount of Euro 187,615.68 received from Gujarat Narmada Valley Fertilizers Company Ltd (GNFC) for technical documentation/engineering services should be exempt from tax. The assessee claimed that this amount was an integral part of the price of the converter basket and connected hardware supplied on an FOB basis from outside India. The Dispute Resolution Panel (DRP) and the Assessing Officer disagreed, treating the amount as taxable in India under section 9(1)(vii) of the Income Tax Act, as it was considered a fee for technical services.

2. Distinction Between Payments for Technical Services and Supply of Equipment:
The assessee contended that the technical documentation and engineering services were essential for the utilization of the supplied equipment and thus formed an integral part of the equipment's cost. However, the DRP noted that the payment was received via a separate invoice, indicating that it was independent of the equipment supply. The DRP held that the fee for services was taxable under section 9(1)(vii) of the Act, considering the retrospective amendment introduced by the Finance Act 2010.

3. Application of Retrospective Amendments to Section 9 of the Income Tax Act:
The DRP and the Assessing Officer relied on the retrospective amendment to section 9, introduced by the Finance Act 2010, which clarified that income in the nature of royalty or fee for technical services is taxable in India irrespective of whether the services are rendered in India or not. This amendment was not considered in the earlier Tribunal decisions cited by the assessee.

4. Relevance of the Double Taxation Avoidance Agreement (DTAA) Between India and Denmark:
The assessee argued that the payment should not be considered as royalty under Article 13 of the Indo-Danish Tax Treaty. The Tribunal had previously held that similar payments were not royalty but were integral to the supply of equipment. However, the DRP did not consider the DTAA provisions in its decision, focusing instead on the retrospective amendment to section 9.

5. Consideration of the Supreme Court's Decision in Ishikawajma-Harima Heavy Industries Ltd vs Director of Income Tax:
The DRP and the Assessing Officer did not consider the Supreme Court's decision in Ishikawajma-Harima Heavy Industries Ltd, which held that for taxability, the entire contract should not be considered integrated if different parts of the contract are executed in different jurisdictions. The Tribunal noted that this decision, along with the retrospective amendment to section 9, was not considered in the earlier years' decisions.

Conclusion:
The Tribunal remanded the issue back to the Assessing Officer for reconsideration, taking into account the two separate agreements for supply of equipment and technical services, the provisions of the DTAA, and the Supreme Court's decision in Ishikawajma-Harima Heavy Industries Ltd. The Tribunal emphasized the need to examine all relevant facts and legal provisions to determine the correct taxability of the payments received by the assessee.

Separate Judgments:
The Tribunal delivered a single judgment for both the assessee's appeal for AY 2007-08 and the revenue's appeal for AY 2008-09, remanding both matters to the Assessing Officer for reconsideration based on the same principles and legal considerations.