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TMI Blog2014 (11) TMI 442X X X X Extracts X X X X X X X X Extracts X X X X ..... ders between 5.00 a.m. and 7.00 a.m. in the morning. For this purpose, it needed a sophisticated plant and machinery (commonly known as mail room equipment') that could collate the various pages of the newspaper, which assisted in printing, picking and stacking them and pack the news papers for timely delivery within the shortest time to its readers. The mail room equipment, therefore, required a complex plant with installed machinery, complete with conveyor belt, which could collate various pages of the newspaper for fast packing for delivery. 4. To acquire such a plant and machinery, the assessee called for global bids for supply, delivery and installation of the plant and machinery and training of its staff. The bid was closed in favour of M/s FERAG AG, Switzerland. 5. The assessee, therefore, entered into two contracts on 8th February 2005 with M/s FERAG AG, Switzerland, a company registered in Switzerland, aggregating to CHF 7,915,000/- (best price, APB 21), of which one for the supply of the various components/units of the mail room equipment, and second for installation and commissioning of the components/units of the mail room equipment in the premises of the assessee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the components/units of the mail room equipment and training of the employees are chargeable to tax under the Income Tax Act in the hands of FERAG AG, Switzerland, the said services are covered by Article 14 of the Double Tax Avoidance Agreement between India and the Swiss Confederation and therefore was only chargeable to tax in the hands of FERAG AG, Switzerland in Switzerland. 8. The CIT(A), while negating the submissions advanced by the assessee in the alternative as in 7(a) and (c) above, upheld the submission as in para 7(b) above. To come to this conclusion, the CIT(A) relied upon the definition of the expression "assembly" as appearing in Black's Law Dictionary, The New International Webster's Students Dictionary and Little Oxford Dictionary, and held that the installation and commissioning of the components/units of the mail room equipment was "assembly" under Explanation 2 to Section 9(1)(vii) of the Act. In so holding, he placed reliance on the decision of the coordinate Bench of the ITAT, Hyderabad Bench, in the case of ITO vs National Mineral Development Corporation Ltd., reported in 42 ITD 570. He, therefore, came to the conclusion that 75% of the remittance made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e agreement of installation, commissioning and training (called Service Contract), which was also signed on 8th February, 2005, which formed part of the APB at pages 56 to 79. He specifically referred to paras 3.2 and 3.3 at APB 60, which referred to the activity of installation and commissioning in the following words: * Bringing and positioning the various components of the equipment; * Properly aligning the entire equipment; * Properly connecting the individual units; * Ensuring that unnecessary vibrations, heat generation is avoided; * Ensuring that all safety features provided by the vendor are properly erected and found to be delivering the desired results; * Testing the mechanical, electrical and control functions to ensure that : * All the components are working in unison as per the design of the vendor; * Individually and collectively the components are working to the maximum rated capacity; * The power drawn by the various components are within the limits prescribed; * To undertake the necessary white paper runs are working optimally; and * To undertake the necessary test runs with printed paper to ensure proper functioning of the equipment. 13. The AR, therea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not compromised when the machines and components were to be individually and/or collectively working to maximum capacity. The detailed activity was prototyped by the engineers deputed by FERAG AG, as enumerated in paras 3.2 and 3.3 of the Contract of Service. The entire activity was carried out over a period of 106 days. He, therefore, submitted that the services carried out by FERAG AG, by way of installation and commissioning were in the nature of "construction, assembly" as appearing as the exclusions in the definition of "Fees for Technical Services" under Explanation 2 to Section 9(1)(vii) of the Income Tax Act and hence the consideration paid to FERAG AG, was not chargeable to tax as FTS. 17. In this connection, the AR relied upon the decision of the Hon'ble ITAT, Hyderabad Bench in the case of ITO vs National Mineral Development Corporation Ltd., reported in 42 ITD 570. He argued that the facts in the said case were identical as that of the assessee and referred to the following para appearing at page 580 of the decision: "From the facts and circumstances before us it cannot be said that the NR simply agreed to provide service of its technical personnel only.It had und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax as "Fees for Technical Services" under the Act, the said services fell within the ambit of independent personal services as defined in Article 14 of the DTAA between the Government of India and the Swiss Confederation, as notified on 21st April 1995. Hence, the said consideration was only taxable in Switzerland and not in India. 19. He, therefore, drew our attention to the said Treaty appearing at pages 80 to 91 of the Paper Book. Para (5) of Article 12 of the said Treaty appearing at page 85 read as follows: "Notwithstanding paragraph 4, "Fees for Technical Services" does not include amounts paid: a) For teaching in or by educational institutions; b) For services covered by Article 14 or Article 15 as the case may be. 20. Relying on the above, the AR submitted, that though the services rendered by FERAG AG, towards installation, commissioning and training, would fall within the expression "Fees for Technical Services" as defined in Para (4) of Article 12 of the Treaty, but in view of para (5)(b) of Article 12, the definition of the term "Fees for Technical Services", did not cover such services as stated in Article 14. 21. The AR, then, referred to Article 14 of the Trea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ineering services rendered by FERAG AG would fall under Article 14 of the Treaty and not under Article 12 :- "An engineer may offer engineering services, which is ordinarily understood as a technical service, but as long as the assignment is a professional one in the nature of independent service, it will more readily fall under this Article than the Article relating to technical service, especially in the context of technical service being understood as parting with technology." 24. As regards the appeal filed by the assessee against the finding of the CIT(A) that 25% of the consideration is attributable towards training and hence exigible to tax as "Fees for Technical Services", the AR submitted that the estimation made by the CIT(A) of 25% of CHF 664,000/- towards training was highly excessive. In this connection, the AR filed the break-up of CHF 664,000/- given by FERAG AG, according to which, only CHF 17,500/- was the attributable towards training. Based on this fact, as per the agreements and the details, as provided by FERAG AG, that at the most the amount of CHF 17,500/- could only be qualified towards training. 25. The AR, therefore, submitted that in so far as the dele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under contract with ONGC. The consideration received by the recipient was hitherto taxed under Section 44BB of the Act but, however, in the assessment year involved the AO invoked Explanation 2 to Section 9(1)(vii) of the Act and sought to tax the consideration as "Fees for Technical Services". The Assessee in the said case had taken shelter that the project being a mining project, it fell within the exception provided under Explanation 2 of Section 9(1)(vii) of the Act. The AR invited pointed out that in para 21 of the order in which the reason as to why this argument did not find favour with the Bench was indicated. From the same, the AR argued that it was apparent that though the assessee in the said case carried on a mining project, the additional condition that "Project should be undertaken by the assessee" was not satisfied in order to avail of the exception. In the present case, the AR submitted that the project of assembling the mail-room equipment was, in fact, undertaken by FERAG AG and, consequently, the conditions, i.e. assembling, installation and training of personal was the indivisible part of the project being undertaken by FERAG AG, and therefore, the referred cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to FERAG AG, and, consequently, the consideration paid towards installation, commissioning and training qualified as "Independent Personal Services" and was therefore, taxable only in Switzerland. 31. We have considered the rival submissions and also perused the relevant materials on record. It is undisputed 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. In this connection, we can safely take the advantage of the observations of the Hon'ble Supreme Court at page 429 in Ishikawajima-Harima Heavy Industries vs Director o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t contention of the AR 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. 33. The next contention of the assessee was that the consideration towards installation and commissioning of the mailroom equipment and training of the employees of the assessee does not fall within the definition of the expression "Fees for Technical Services" under Explanation 2 to Section 9(1)(vii) of the Act. This argument of the AR is based on the view that the services rendered by FERAG AG, will fall within the purview of the word "Assembly" appearing in the expression "construction, assembly or like project undertaken by the recipient". This argument found favour with the CIT(A). In support of the same, the AR has heavily relied on the decision of the coordinate Bench at Hyderabad, in National Mineral Development Corporation Ltd. (supra). The CIT(A) while upholding this argument of the assessee relied upon the definition of the expression "Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtue of the provisions of Article 14 of the DTAA between India and the Swiss Confederation. It is seen that though, 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. 36. It is also common ground that FERAG AG, does not have a fixed base in India for performing its engineering activities and that the engineers sent from abroad stayed in India for training purposes for an aggregate period of 106 days, hence, taxable. The argument ..... X X X X Extracts X X X X X X X X Extracts X X X X
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