2013 (2) TMI 431 - AT - Income Tax

India Germany DTAA - payment made to Pehla Testing Laboratory (Pehla) Germany towards type tests - whether the payment made to Lab in Germany, for carrying out certain tests on circuit breakers manufactured by assessee for the purpose of certification, so as to meet the international standard, falls within the meaning of fees for technical services and is taxable within the meaning of section 9(1)(vii)? - Held that - Assessee before the AO after drawing his attention to the flyer received from the Pehla had categorically pointed out that the standard service provided by the PTL is without any human intervention. This factor has not been disputed by him. Even before the CIT (A), this contention has been deposed again by the assessee. None of the authorities have either rebutted this contention of assessee, or has given any adverse remark or findings that there was any human intervention in the process. CIT (A) as well as AO have gone merely by the fact that such a type testing services provided by the PTL is highly sophisticated and technical, and it cannot be considered as non technical. The CIT (DR) had argued that for observing the process, preparing the report, issuance of certificate and for monitoring of machines, human involvement is definitely there, therefore, it cannot be held that there is no human intervention. This cannot be the criteria for understanding the term technical services as contemplated in Explanation 2 to section 9(1)(vii). If any person delivers any technical skills or services or make available any such services through aid of any machine, equipment or any kind of technology, then such a rendering of services can be inferred as technical services . In such a situation there is a constant human endeavour and the involvement of the human interface. On the contrary, if any technology or machine developed by human and put to operation automatically, wherein it operates without any much of human interface or intervention, then usage of such technology cannot per se be held as rendering of technical services by human skills. It is obvious that in such a situation some human involvement could be there but it is not a constant endeavour of the human in the process. Merely because certificates have been provided by the humans after a test is carried out in a Laboratory automatically by the machines, it cannot be held that services have been provided through the human skills. Therefore, the contention raised by the learned CIT (DR) does not appeal much . Thus if a standard facility is provided through a usage of machine or technology, it cannot be termed as rendering of technical services. Once in this case it has not been disputed that there is not much of the human involvement for carrying out the tests of circuit breakers in the Laboratory and it is mostly done by machines and is a standard facility, it cannot be held that Pehla Testing Laboratory is rendering any kind of technical services to assessee. Thus to hold that payment made by assessee to the PTL in Germany is not in consideration for rendering of any kind of technical services either in the nature of managerial or technical or consultancy services. Therefore, it does not fall within the ambit of section 9(1)(vii) - in favour of assessee.

Summary

Issues Involved
1. Whether tax is required to be deducted at 10% from the payment made to Pehla Testing Laboratory (PTL) for type tests.
2. Whether the payment to PTL is considered as fees for technical services (FTS) under section 9(1)(vii) of the Income Tax Act, 1961 and the Double Taxation Avoidance Agreement (DTAA) between India and Germany.
3. Whether the payment is in the nature of business profits and, in the absence of a Permanent Establishment (PE) in India, not liable to tax in India as per Article 7 of the DTAA.

Detailed Analysis

Issue 1: Tax Deduction at Source (TDS) Requirement
The appellant argued that no tax is required to be deducted at 10% from the payment made to PTL for type tests. The CIT(A) upheld the AO's decision that the payment to PTL is taxable in India as fees for technical services (FTS) under section 9(1)(vii) of the Income Tax Act and the DTAA between India and Germany. The appellant contended that the payment was for a standard facility provided by PTL using sophisticated equipment without human intervention, and thus should not be considered as FTS.

Issue 2: Nature of Payment as Fees for Technical Services
The appellant asserted that the payment to PTL does not fall under the definition of FTS as per Explanation 2 to section 9(1)(vii), which involves a human element. The AO and CIT(A) determined that the services provided by PTL are highly technical and fall under FTS. The CIT(A) referred to various judgments to support this conclusion and noted that the services were utilized in India, making them taxable in India.

The Tribunal analyzed whether the payment made to PTL for type tests, conducted automatically by machines, constitutes FTS. It was noted that the term "technical services" should involve human intervention, as indicated by the terms "managerial" and "consultancy" in Explanation 2 to section 9(1)(vii). The Tribunal referred to the Delhi High Court's judgment in CIT v. Bharati Cellular Ltd., which emphasized that technical services must involve human interaction.

The Tribunal found that the tests conducted by PTL were automatic and did not involve significant human intervention, thus not qualifying as FTS. The Tribunal concluded that the payment to PTL is not for technical services as defined under section 9(1)(vii) and therefore, not subject to tax deduction at source.

Issue 3: Payment as Business Profits under DTAA
The appellant argued that the payment to PTL should be considered as business profits and, in the absence of a PE in India, not liable to tax in India under Article 7 of the DTAA between India and Germany. The CIT(A) rejected this argument, stating that the payment falls under FTS and is taxable in India.

Given the Tribunal's conclusion that the payment does not constitute FTS, the argument regarding business profits becomes moot. Since the payment is not considered FTS, it does not fall under the purview of Article 12(4) of the DTAA, and the issue of PE under Article 7 is irrelevant.

Conclusion
The Tribunal held that the payment made by the assessee to PTL for type tests does not constitute fees for technical services under section 9(1)(vii) of the Income Tax Act, as it lacks human intervention. Therefore, there was no requirement to deduct tax at source on such payment. Consequently, the other issues raised by the assessee were deemed academic and infructuous, leading to the appeal being allowed in favor of the assessee.