2010 (11) TMI 193 - AT - Income Tax

Tribunal Rules in Favor of Appellant: Payments to GTA Not Taxable

The Tribunal allowed the appeals of the appellant, determining that the payments made to GTA did not qualify as 'Fees for Technical Services' under the ... Fees for technical services - International transaction - TDS - Held that: - The erection of machines was thus work of many local workers. The two technicians only supervised the erection and giving technical advice in connection with the erection. - Technical fee is for technical advice in connection with erection and the actual erection was done by others. - The payment of fee is only for giving technical advice in connection with the erection and not for undertaking the erection. - The payment in question cannot be said to be a payment for assembly of machines. Thus the payment in question cannot be said to fall within the exclusion clause of Expln-2 to section 9(l)(vii) of the Act.TDS u/s 195 - Held that: - the payment in question would not be chargeable to tax in India because admittedly, the person who rendered services were not present in India for the required number of days as envisaged by Article 5(j) of the DTAA. Therefore the amount in question will not be chargeable to tax in the hands of GTA. Thus there was no obligation on the part of the appellant to deduct tax at source before making payment to GTA. Issues Involved:1. Whether the payment made by the appellant to GTA qualifies as 'Fees for Technical Services' under section 9(1)(vii) of the Income-tax Act.2. Applicability of Article 15 of the DTAA between India and Italy.3. Whether the reimbursement of expenses is chargeable to tax.4. Imposition of education cess on the payments made to the non-resident.5. Proper rate of tax applicable under section 115A(b) of the Act.Detailed Analysis:1. Whether the Payment Made by the Appellant to GTA Qualifies as 'Fees for Technical Services' under Section 9(1)(vii) of the Income-tax Act:The appellant contended that the payment made to GTA was for re-assembly and commissioning, which falls under the exclusion category of 'consideration for any construction, assembly, mining or like project undertaken by the recipient' as per Explanation 2 to section 9(1)(vii). The AO and CIT(A) rejected this plea, stating that the services provided by GTA were technical and did not constitute a 'construction, assembly, mining or like project.' The Tribunal upheld this view, emphasizing that the technicians from GTA were only supervising and providing technical advice for the re-assembly and commissioning of machinery, which does not qualify as an 'assembly project' under the exclusion clause of Explanation 2 to section 9(1)(vii).2. Applicability of Article 15 of the DTAA between India and Italy:The appellant argued that under Article 15 of the DTAA, since the technicians would not be present in India for more than 183 days, the payment should not be taxable in India. The AO and CIT(A) disagreed, stating that Article 15 applies only to individuals and not to companies. The Tribunal, however, referred to the decision of the AAR in the case of Horizontal Drilling International and concluded that the payment for supervisory services rendered for less than six months does not constitute a permanent establishment under Article 5(2)(j) of the DTAA. Therefore, the payment is not taxable in India.3. Whether the Reimbursement of Expenses is Chargeable to Tax:The CIT(A) held that the reimbursement of expenses is not taxable and directed the AO to exclude such reimbursements from the fees for technical services while computing tax. The Tribunal upheld this view, referring to the decision of the Bombay High Court in the case of DIT(International Taxation) v. KRUPP UDHE GmbH, which held that reimbursement expenses are not chargeable to tax.4. Imposition of Education Cess on the Payments Made to the Non-Resident:The CIT(A) held that education cess cannot be levied on the payments made to the non-resident. The Tribunal did not specifically address this issue, as the primary contention regarding the taxability of the payment itself was resolved in favor of the appellant.5. Proper Rate of Tax Applicable under Section 115A(b) of the Act:The appellant contended that the rate of tax should be 10% as per section 115A(b) of the Act. The CIT(A) did not decide on this issue. The Tribunal noted that since it concluded that the amounts in question are not chargeable to tax, the question regarding the applicable rate of tax does not need adjudication.Conclusion:The Tribunal allowed the appeals of the appellant, holding that the payments made to GTA are not chargeable to tax in India under the DTAA, as the services rendered were supervisory in nature and did not constitute a permanent establishment. Consequently, there was no obligation on the appellant to deduct tax at source. The appeals by the revenue were dismissed.