Technical supervision fees for machinery erection were taxable under domestic law but not under the DTAA absent a permanent establishment.

Payments for technical supervision of re-assembly, erection and commissioning of machinery were held not to qualify for the assembly-project exclusion in Explanation 2 to section 9(1)(vii) because the foreign technicians only supervised and assisted the work rather than undertaking the project as a whole. The same remuneration was also treated as not taxable in India under the DTAA, since the supervisory activities lasted less than six months and no permanent establishment arose under the treaty framework. On that basis, the remittance was not chargeable to tax in India and no tax was deductible at source.

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Issues: (i) Whether the consideration paid to the foreign company for deputing technicians for re-assembly, erection and commissioning of machinery fell within the exclusion from "fees for technical services" in Explanation 2 to section 9(1)(vii). (ii) Whether the same payment was taxable in India under the DTAA in the absence of a permanent establishment, having regard to the nature and duration of the supervisory activities.

Issue (i): Whether the consideration paid to the foreign company for deputing technicians for re-assembly, erection and commissioning of machinery fell within the exclusion from "fees for technical services" in Explanation 2 to section 9(1)(vii).

Analysis: The agreement showed that the foreign technicians were engaged to supervise and assist re-assembly, erection and commissioning of machinery already available at the assessee's site. The arrangement was independent of any composite contract for supply and erection of machinery. The exclusion in Explanation 2 applies where the consideration is for a construction, assembly, mining or like project undertaken by the recipient, but not where the recipient merely provides technical personnel or advice for supervision of such work. The technicians did not themselves undertake the assembly project as a whole.

Conclusion: The payment did not fall within the exclusion and was in the nature of fees for technical services.

Issue (ii): Whether the same payment was taxable in India under the DTAA in the absence of a permanent establishment, having regard to the nature and duration of the supervisory activities.

Analysis: The services rendered were supervisory in nature, but the project period was less than six months. Under the treaty framework, supervisory activities constitute a permanent establishment only when the relevant site, project or activities continue beyond the stipulated duration. On harmonious construction of the treaty provisions relating to technical services and permanent establishment, consideration for such short-duration supervisory services was not taxable as business profits in India in the absence of a permanent establishment. Consequently, the payer had no obligation to deduct tax at source on the remittance.

Conclusion: The amount was not chargeable to tax in India under the DTAA and no tax was deductible at source.

Final Conclusion: The assessee succeeded in its challenge to the tax withholding demand, while the revenue's appeal failed.

Ratio Decidendi: Payments for technical supervision connected with erection or commissioning are not excluded from fees for technical services merely because they relate to assembly-like work, and where the treaty deems supervisory activities to create a permanent establishment only beyond a specified duration, short-duration supervisory services are not taxable in India absent such permanent establishment.

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