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Issues Involved:
1. Nature of payments made to M/s Rosoboronexport: Whether they were for the purchase of AL-551 aircraft engines or fees for technical services under Section 9(1)(vii) of the IT Act or Article 12(4) of the DTAA between India and Russia. Issue-wise Detailed Analysis: Nature of Payments Made to M/s Rosoboronexport: 1. Background and Contractual Terms: - The assessee, Aircraft Research and Design Center (ARDC), entered into a contract with M/s Rosoboronexport on June 29, 2005, for the development, manufacture, and testing of the AL-551 engine for the Indian HJT-36 trainer aircraft. - The contract included various annexures detailing technical requirements, work schedules, lists of materials, documentation, and payment schedules. 2. Assessing Officer's (AO) Findings: - The AO concluded that the services rendered under the composite contract by M/s Rosoboronexport fell into the category of 'technical services' as per the IT Act and DTAA with Russia. - The AO held that the amounts paid were fees for technical services in India under Article 12 of the DTAA read with Section 9(1)(vii) of the IT Act. - The AO determined that the assessee was required to deduct tax under Section 195(1) and treated the assessee as a defaulter under Section 201(1), also charging interest under Section 201(1A). 3. Assessee's Contentions: - The assessee argued that the payments were for the purchase of AL-551 aircraft engines and not for technical services. - The contract was for the development and manufacture of customized engines to suit specific requirements, with incidental services linked to the process of manufacture and supply. - The assessee cited various judicial pronouncements to support its case, including CIT vs. Klayman Porcelains Ltd., Dy. CIT vs. Taikisha Ltd., and others. 4. CIT(A)'s Decision: - The CIT(A) upheld the AO's view, confirming that the payments constituted fees for technical services and dismissing the appeal filed by the assessee. 5. Tribunal's Analysis: - The Tribunal examined the contract in detail, noting that the primary requirement was the supply of 3 prototype engines for the HJT-36 aircraft. - Article 2.1 of the contract specified the development and delivery of the AL-551 engine, including ground tests and flight tests, but did not explicitly mention fees for technical services. - Article 21.3 of the contract prohibited the customer from copying or reproducing the material and documentation without the supplier's consent, indicating that the contract was for the supply of engines rather than technical services. - The Tribunal referenced Explanation 2 to Section 9(1)(vii) of the IT Act, which defines 'fees for technical services' and concluded that the payments for the engines, including associated technical know-how, did not fall under this definition. - The Tribunal also cited relevant case law, including the Supreme Court's ruling in Padmasundara Rao (Decd.) & Ors. vs. State of Tamil Nadu & Ors. and the Madras High Court's decision in CIT vs. Neyveli Lignite Corporation Ltd., to support its interpretation. 6. Conclusion: - The Tribunal concluded that the payments made by the assessee to M/s Rosoboronexport were for the purchase of AL-551 aircraft engines and not for technical services. - The payments did not constitute fees for technical services under Section 9(1)(vii) of the IT Act or Article 12(4) of the DTAA between India and Russia. - The appeals filed by the assessee were allowed, and the assessee was not required to deduct tax under Section 195 for the payments made to M/s Rosoboronexport. Final Judgment: - The appeals filed by the assessee were allowed, and the payments made to M/s Rosoboronexport were deemed to be for the purchase of AL-551 aircraft engines, not fees for technical services.
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