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2017 (2) TMI 638 - AT - Income TaxTDS u/s 195 - payments made to the non-residents for dismantling and sea worthy packing of paper mill machinery are payments made for fees for technical services - DTAA between India and Poland - assessee in default - Held that - There is a difference between Contract of work and Contract of service . The two words convey different ideas. In the 'Contract of work' the activity is predominantly physical; it is tangible. In the activity referred as 'Contract of service', the dominant feature of the activity is intellectual, or at least, mental. Certainly, 'Contract of work' also involves intellectual exercise to some extent. Even a gardener has to bestow sufficient care in doing his job; so is the case with a mason, carpenter or a builder. But the physical (tangible) aspect is more dominant than the intellectual aspect. In contrast, in the case of rendering any kind of 'service', intellectual aspect plays the dominant role. In the case under consideration, the scope of work mentioned in the agreement clearly explains that it is contract of work to dismantle the machinery, therefore, it is not a contract of service hence payment by the assessee is not for technical services, therefore, the assessee company is not liable to deduct TDS. Thus we are of the view that dismantling of machinery does not require any technical services, therefore, the present case does not fall in the ambit of fees for technical services and the assessee company does not require to deduct TDS. - Decided in favour of assessee
Issues Involved:
1. Classification of the contract between the assessee and the Polish company as a "works contract" or a "contract for technical services". 2. Determination of whether the payments made to the Polish company qualify as "fees for technical services" under the Income Tax Act, 1961, and the India-Poland DTAA. 3. Requirement of Tax Deducted at Source (TDS) on the payments made to the Polish company. Issue-wise Detailed Analysis: 1. Classification of the Contract: The primary issue was whether the contract between the assessee and the Polish company, POL-INOWEX S.A., was a "works contract" or a "contract for technical services". The CIT(A) observed that the contract involved dismantling, packing, and loading of paper mill machinery, which required skilled manpower but was fundamentally a works contract. The CIT(A) referenced the Supreme Court's decision in Builders Association of India v. Union of India, which distinguishes between a works contract and a contract for technical services based on the nature of expertise required. 2. Determination of "Fees for Technical Services": The Assessing Officer (AO) classified the payments as "fees for technical services" under Section 9(1)(vii)(c) of the Income Tax Act and Article 13-4 of the DTAA between India and Poland. The CIT(A) disagreed, stating that the dismantling work did not involve technical services but was a "like project" under Explanation 2 of Section 9(1)(vii). The CIT(A) cited the Hon'ble Hyderabad ITAT's decision in BHEL-GE-Gas Turbine Service (P) Limited, which held that disassembly of machinery does not constitute technical services. 3. Requirement of TDS: The AO argued that TDS was required as the payment was for technical services. The CIT(A) countered this by stating that the contract was for dismantling, a works contract, and not for technical services. Consequently, the payments were business income arising outside India, and since POL-INOWEX S.A. had no permanent establishment in India, the income was not taxable in India, and no TDS was required. Revenue's Appeal: The Revenue contended that the CIT(A) erred in classifying the contract as a works contract and not as a contract for technical services. They argued that the dismantling required technical knowledge and thus fell under "fees for technical services". The Revenue also disputed the reliance on the Hyderabad Tribunal's decision and other precedents, asserting that the facts differed significantly. Tribunal's Decision: The Tribunal upheld the CIT(A)'s decision, agreeing that the contract was a works contract and not for technical services. The Tribunal noted that dismantling did not require significant technical expertise and was akin to a "like project" under Section 9(1)(vii). The Tribunal emphasized the distinction between "contract of work" and "contract of service", supporting the CIT(A)'s view that the payments did not qualify as fees for technical services. Consequently, the Tribunal concluded that no TDS was required on the payments. Conclusion: The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s order that the payments made to POL-INOWEX S.A. were for a works contract and not for technical services, thus exempting the assessee from the obligation to deduct TDS. The Tribunal's decision was pronounced on 07/01/2017.
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