2023 (10) TMI 458 - AT - Income Tax

Income accrued in India - engineering package fee and on-site man-day charges - whether can be treated as FTS under the treaty provisions? - assessee is a non-resident corporate entity incorporated in France and a tax resident of that country - assessee claiming benefit of the Most Favoured Nation ( MFN ) clause in paragraph 7 of Protocol to India France DTAA has claimed benefit by taking shelter under the definition of FTS as provided under Article 12(4) of India Portugal DTAA - HELD THAT - As observed that the amount of Rs. 10,35,94,783/- was received by the assessee for providing basic site data lists, which included flow sheets, specifications, drawings, layouts, operating manuals, procedures to build/construct/install/assemble these smelter plants. It is not a simple case of loading a technology solution/software as observed by Commissioner (Appeals). The smelter plant certainly requires installation of multiple plants and machineries. It involves on-site planning and supervision of erection and installation of not only civil work but also the plant and machinery. There cannot be any dispute that the installation/erection process has to be taken up as per the flowsheets, equipments, specifications, drawings, layouts, operating manuals, procedures etc., without which, the installation process cannot be carried out. Therefore, in our view, the service rendered by the assessee is in connection with installation/erection of plant and machinery involved in mining of natural resources. Moreover, scope of Article 5(2)(g) of India Portugal DTAA is not merely limited to mining or extraction of natural resources but also covers installation or structure used for exploration and exploitation of nature resources. Therefore, in our considered view, the amounts received would fall within the exceptions provided under Article 12(5)(f) and 12(5)(g) of India Portugal DTAA, hence, not taxable at the hands of the assessee. Balance amount out of the engineering package fee, it is observed from the facts on record that they are not part of the TLA, but in pursuance to two independent purchase orders. In fact, learned first appellate authority has accepted the aforesaid factual position in paragraphs 5.2.12 and 5.2.13 of the order passed under section 154 of the Act. Therefore, they cannot be treated as fall out of the TLA so as to qualify as FTS under Article 12(4)(a) of the tax treaty. In fact, learned first appellate authority has treated it as FTS under Article 12(4)(b) of India Portugal DTAA by stating that it comes within the ambit of second limb of Article 12(4), which does not require fulfillment of make available condition. However, on a reading of Article 12(4)(b) as a whole, it certainly appears that even the second limb that consists of development and transfer of technical plan or technical design , also requires the satisfaction of make available condition, as such words are qualified by which enables the persons acquiring services to apply the technology contained therein . The assessee has received the amount for providing drawings to enable HIL to study and comment on specific proposal involving process specification, equipment lists for paste plant and anode recycling shops of green anode based on RHODAX Technology. Facts on record reveal that the primary purpose of providing such documents, designs and drawings was for the appraisal of the contractee. It does not per se mean transfer of technology. There is nothing on record to suggest that the assessee is also the owner of RHODEX Technology. There is no evidence brought on record by the Revenue to establish that the drawings, designs etc. provided by the assessee has enabled the recipients to apply the technology contained therein independently. Thus, in our considered opinion, the amount included in the engineering package services would not qualify as FTS under Article 12(4)(b) of India Portugal DTAA. On-site man-day fee though, it is in pursuance to TLA and may qualify for FTS under Article 12(4)(a), however, in our view, the receipts fall within the exceptions provided under Article 12(5)(f) and 12(5)(g) of India Portugal DTAA, hence, would not qualify as FTS. Thus, we hold that the receipts in dispute are not taxable as FTS at the hands of the assessee. Assessee appeal allowed.

Summary

Issues Involved:

1. Condonation of Delay in Filing Appeals
2. Taxability of Engineering Package Fee and On-Site Man-Day Charges as Fees for Technical Services (FTS)
3. Application of Most Favoured Nation (MFN) Clause under India-Portugal DTAA
4. Treatment of Receipts under Technical Collaboration Agreement (TCA)

Condonation of Delay in Filing Appeals:

Appeals in ITA Nos. 9483/Del/2019 and 9484/Del/2019 were delayed by 45 days. After considering the submissions of the parties and perusing the materials on record, the Tribunal condoned the delay, satisfied that it was due to a genuine cause, and admitted the appeals for adjudication on merits.

Taxability of Engineering Package Fee and On-Site Man-Day Charges as Fees for Technical Services (FTS):

The assessee, a non-resident corporate entity, claimed that the income declared as Royalty/FTS under Article 13 of India - France DTAA was not taxable in India. The Tribunal examined whether the engineering package fee of Rs. 15,94,34,150/- and on-site man-day charges of Rs. 1,39,90,735/- could be treated as FTS under the treaty provisions. The Tribunal concluded that the services rendered were in connection with the installation/erection of plant and machinery involved in mining of natural resources, thus falling within the exceptions provided under Article 12(5)(f) and 12(5)(g) of India - Portugal DTAA, and hence, not taxable at the hands of the assessee.

Application of Most Favoured Nation (MFN) Clause under India-Portugal DTAA:

The assessee claimed the benefit of the MFN clause in paragraph 7 of the Protocol to India - France DTAA, referring to the definition of FTS under Article 12(4) of India - Portugal DTAA. The Tribunal accepted the assessee's claim, noting that the services provided did not make available any technical knowledge, skill, etc., to the service recipient, and thus, the receipts did not qualify as FTS under Article 12(4)(b) of India - Portugal DTAA.

Treatment of Receipts under Technical Collaboration Agreement (TCA):

For the assessment year 2011-12, the Tribunal noted that the Technical Collaboration Agreement (TCA) had expired on 19.01.2010. Therefore, the receipts could not fall under Article 12(4)(a) of India - Portugal DTAA. The Tribunal directed the Assessing Officer to delete the additions, concluding that the facts and issues involved were identical to the previous appeal and the assessee's case stood on a better footing as the TCA was not in force in the impugned assessment year.

Conclusion:

ITA Nos. 9483/Del/2019 and 9484/Del/2019 were allowed, and ITA No. 3410/Del/2016 was dismissed.

Order pronounced in the open court on 6th September, 2023.