2014 (11) TMI 442 - AT - Income Tax

Fees for technical services under Explanation 2 to Section 9(1)(vii) DTAA between India and the Swiss Confederation - Services rendered for installation, commissioning of the mailroom equipment and the training - Held that - The mailroom equipment comprised of various units and was hence a complex equipment - The bid document clearly stipulated that the units/components of the mailroom equipment would have to be installed and commissioned by trained and qualified personnel of the supplier, who shall, then provide training to the assessee s employees, on the operation and maintenance of mailroom equipment - The price quoted included installation, commissioning and training - The mere fact that both the contracts, i.e. for supply of the mailroom equipment and its installation, commissioning and training were entered into on the same date would not lead to an automatic conclusion that they should be read in isolation with the other. The assessee has entered into two contracts, one for the supply and one for the services - The price for supply is separately indicated in the contract for supply and that for the services in the contract for services - the equipment could be installed by anybody, with the only requirement, that the person who installs the equipment, should be certified by the vendor, as qualified to install the same - This is not the same as saying that qualified personnel of the vendor should install the equipment as is only indicated in the bid document and not in the contract signed by the assessee the contention of the assessee that the services rendered by FERAG AG, by way of installation, commissioning of the mailroom equipment and the training of the assessee s employees as inextricably and essentially linked to the sale of the mailroom equipment and hence not taxable separately as Fees for Technical Services , cannot be accepted. The services rendered by FERAG AG, towards installation and commissioning of the mailroom equipment and training are Fees for Technical Services as defined under the Act, the consideration paid towards these services are only taxable in Switzerland in the hands of FERAG AG, by virtue of the provisions of Article 14 of the DTAA between India and the Swiss Confederation - the Treaty between India and Swiss Confederation in Article 12(4) defines Fees for Technical Services , as including the services rendered by FERAG AG, towards installation and commissioning and training, Article 12(5) provides that services covered under Article 14 of the Treaty will not qualify for Fees for Technical Services . Article 14 of the Treaty, though, overrides Article 12(4) while defining the term Professional Services , includes independent activities of engineers - Such independent engineering activities would not cover training given to the employees of the assessee - Though a training activity may be connected to an engineering concern, that by itself, would not constitute training, to be an engineering activity so as to fall within professional services under Article 14 of the Treaty. Thus, the contention of the assessee that Article 14 of the Treaty applies to the services rendered by FERAG AG, and the consideration relating to installation and commissioning of units of the mailroom equipment is taxable in Switzerland, is upheld - the training period would not have been substantial and that too not essentially shop floor training, as to how to operate the mail room equipment, which would have been training on the machine, Article 12 shall apply on class room training thus, an estimate of 25% of CHF 17,500/-, as attributable to training, would be reasonable Decided against revenue.

Summary

Issues Involved:
1. Whether the payment made by the assessee towards installation, commissioning, and training of mail room equipment is taxable as "Fees for Technical Services" under the Income Tax Act.
2. Whether the services rendered by FERAG AG fall within the ambit of "construction, assembly or like project" under Explanation 2 to Section 9(1)(vii) of the Act.
3. Applicability of Article 14 of the Double Tax Avoidance Agreement (DTAA) between India and the Swiss Confederation to the services rendered by FERAG AG.
4. Correctness of the CIT(A)'s estimation of 25% of the payment as attributable to training and taxable as "Fees for Technical Services."

Issue-wise Detailed Analysis:

Issue 1: Taxability of Payment as "Fees for Technical Services"
The assessee argued that the services for installation, commissioning, and training were inextricably linked to the supply of equipment and should not be taxed separately as "Fees for Technical Services." The Tribunal noted that the contracts for supply and services were distinct, with separate pricing and obligations. Hence, the services rendered by FERAG AG could be considered independently for tax purposes. The Tribunal concluded that the payments for installation, commissioning, and training were indeed liable to be considered as "Fees for Technical Services" under the Act.

Issue 2: Services as "Construction, Assembly or Like Project"
The assessee contended that the services fell within the "assembly" exclusion under Explanation 2 to Section 9(1)(vii) of the Act. The CIT(A) and Tribunal agreed that the activities of positioning, aligning, and connecting components to ensure proper functioning constituted "assembly." Consequently, the payments for installation and commissioning did not fall under "Fees for Technical Services." However, the training services did not qualify as "assembly" and were thus taxable as "Fees for Technical Services."

Issue 3: Applicability of Article 14 of the DTAA
The Tribunal examined whether the services rendered by FERAG AG fell under "independent personal services" as defined in Article 14 of the DTAA. The Tribunal found that the engineering services for installation and commissioning were covered under Article 14, making them taxable only in Switzerland. However, training services did not fall under "professional services" and were taxable in India. The Tribunal rejected the department's argument that Article 14 applied only to individuals, noting that the DTAA referred to "residents of a contracting state."

Issue 4: Estimation of Training Costs
The CIT(A) had estimated that 25% of the payment was attributable to training and taxable as "Fees for Technical Services." The assessee argued that this estimation was excessive and provided a breakdown showing only CHF 17,500 was for training. The Tribunal found the CIT(A)'s estimation excessive and accepted the assessee's breakdown. The Tribunal concluded that 25% of CHF 17,500 could be reasonably attributed to training and taxed accordingly.

Conclusion:
The Tribunal dismissed the revenue's appeal and partly allowed the assessee's appeal. It upheld the CIT(A)'s decision that the payments for installation and commissioning were not taxable as "Fees for Technical Services" but modified the estimation of training costs to CHF 17,500, with 25% of this amount being taxable as "Fees for Technical Services." The order was pronounced on 12th November 2014.