2014 (9) TMI 262 - AT - Income Tax

Non-deduction of TDS Payment made to Czech Republic for services in connection with purchase of 4000 tons forging press - Assessee in default Held that - Considering the magnitude of erection and commissioning activity undertaken in the present appeal, it could not be considered as a project - it does not fall within the exclusion clause of the Explanation 2 - the charges are paid for erection and commissioning are not excluded from the definition of fees for technical services - payments made for supervision of erection and for service work were clearly out of the exclusion of Explanation 2 and are taxed as fees for technical services - the CIT(A) held that payments made by the assessee are covered and are taxable under fees for technical services u/s 9(l)(vii). The assessee company wanted to set up a forging industry at Pune - The assessee bought forge and similar machines from various parties - The assessee intended that these heavy machinery needs to be properly erected, considering technical aspects of installation - The assessee agreed for separate consideration for transport/travel of the machines - assessee also ordered the parties to supervise erection/installation of the heavy machines - The assessee also agreed to separate consideration for Air-fare (economy class) for the technicians assigned by supplier for the purpose - the payments for C & F charges relates to functions and activities performed in foreign country - The payments for such transportation do not accrue in India since there is no aspect involved which creates a charge for Income-tax in India - The payment terms for these C & F charges indicate the nexus to the transaction of sale of machinery - payment cannot be said to be accrued in India since there is no aspect involved which created charge for under the provisions of I.T. Act, because this took place only outside Indian Territory. Travelling expenses of technicians Supervision of installation/erection - Held that - The technicians travel expenses were negotiated and paid separately on economy airfare basis. Such expenses were for cross border travel and hence, do not arise in India and does not attract provisions of Indian Income-tax Act - the machinery is complex equipment, hence could not be installed by any ordinary person that is why only machinery seller nonresident was given contract of erection and installation and services thereof. Such erection/installation of highly complex machinery was not comparable to ordinary installation just because two separate agreements were reached, one for sale transaction and other for installation/erection and other related services - The principle of inextricable nexus does not change - the part payment for purchase of sale of machinery transaction was linked to successful erection of machinery at Chakan, Pune in all the contracts - it was not obligatory on the part of assessee to deduct the tax at source on entire payment even if it does not offer u/s. 195(2) for deduction at a lower or nil rate - Decided in favour of assessee. Payment made for acquiring the designs and drawings of Bolster & Cassette Held that - The designs and drawings were acquired by assessee for ensuring smooth performance of purchased plant and machinery - assessee neither used the drawings in manufacturing of the machinery nor did exploit it for any other commercial purpose - the acquisition of the drawings along with purchase of machinery was necessary for its maintenance - CIT(A) was justified in holding that it was purchase transaction as no technology know how relating to machinery was made available to assessee - the assessee was not liable to deduct tax on payment made to Manyo Company Ltd., Japan Decided against Revenue.

Summary

Issues Involved:
1. Whether the assessee is in default for non-deduction of TDS on payments made for services related to the purchase of machinery.
2. Whether the payments made for acquiring designs and drawings are taxable in India.
3. Whether the delay in filing the appeal should be condoned.

Detailed Analysis:

1. Non-Deduction of TDS on Payments for Services Related to Machinery Purchase:

The assessee filed three appeals (ITA No.2563/PN/2012, ITA No.2564/PN/2012, ITA No.2565/PN/2012) challenging the CIT(A)'s decision that the assessee is an 'assessee in default' for not deducting TDS on payments made to foreign entities for services connected to the purchase of machinery. The services included installation, assembly, erection, commissioning, and supervision of forging presses. The CIT(A) held that these payments were taxable under Section 9(1)(vii) as 'fees for technical services' and under Article 12 of the respective tax treaties. The CIT(A) rejected the assessee's argument that these were composite contracts and instead treated the transactions of purchase and services separately, making them liable for TDS.

The Tribunal found that the payments for C & F charges and technicians' travel expenses did not accrue in India and thus did not attract Indian Income-tax provisions. Regarding supervision of installation/erection, the Tribunal noted that such services were integral to the sale of complex machinery and should be considered part of the purchase price, irrespective of being charged separately. The Tribunal referenced several case laws, including the Hon'ble Calcutta High Court's decision in Andrew Yule & Co. Ltd. v. CIT and the Hon'ble Supreme Court's decision in Ishikawajma-Harima Heavy Industries Ltd. v. DIT, to support that such services are not taxable as 'fees for technical services' when they are ancillary and linked to the supply of equipment.

2. Taxability of Payments for Acquiring Designs and Drawings:

The revenue filed an appeal (ITA No.1985/PN/2012) challenging the CIT(A)'s decision that payments made to Manyo Co. Ltd., Japan, for designs and drawings were not taxable in India. The CIT(A) held that these payments were for ensuring the smooth performance of the purchased machinery and did not involve the transfer of technology know-how. Therefore, they were not taxable as 'fees for technical services' under Section 9(1)(vii) or Article 12 of the India-Japan Tax Treaty.

The Tribunal upheld the CIT(A)'s decision, agreeing that the acquisition of these drawings was necessary for the maintenance of the machinery and did not constitute a transfer of technology know-how. Thus, the assessee was not liable to deduct tax on these payments.

3. Condonation of Delay in Filing the Appeal:

The assessee requested condonation of an 86-day delay in filing the appeal, citing the need for internal deliberations and expert opinions due to the technical nature of the matter. The Tribunal found the reasons sufficient and condoned the delay, referencing the Hon'ble Allahabad High Court's decision in Bharat Auto Center v. CIT, which condoned a delay due to the involvement of an important legal point.

Conclusion:

The Tribunal allowed the assessee's appeals, holding that the payments for services related to the purchase of machinery were not liable for TDS as they were integral to the purchase price. The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decision that payments for designs and drawings were not taxable in India. The delay in filing the appeal was condoned.