Composite contract receipts taxed only in part where Indian services and technical knowledge transfer triggered DTAA liability

Composite contract receipts were apportioned by the nature and place of performance of the services. Inspection and boroscoping carried out in India were taxable as fees for technical services, while overhauling performed in the United States was not taxable in India because it did not satisfy the make available requirement under Article 12 of the Indo-US DTAA. Modifications and replacement work accompanied by delivery of engineering designs, data and specifications were treated as making available technical knowledge and were taxable in India as fees for included services or royalty. Tax deduction at source under section 195 applied only to the portion of consideration found taxable in India.

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Issues: (i) Whether the receipts for inspection, boroscoping, overhauling and related modification services under the contract were taxable in India under the Income-tax Act and the Indo-US DTAA. (ii) Whether tax was required to be withheld under section 195 of the Income-tax Act on the apportioned consideration.

Issue (i): Whether the receipts for inspection, boroscoping, overhauling and related modification services under the contract were taxable in India under the Income-tax Act and the Indo-US DTAA.

Analysis: The consideration under the contract was held to be severable by reference to the nature and place of performance of the services. The portion attributable to inspection and boroscoping carried out in India was treated as fees for technical services under the Act. The portion attributable to overhauling performed in the United States, by itself, did not satisfy the make available requirement under Article 12 of the DTAA and was not taxable in India as included services. However, the portion attributable to modifications and replacement of parts, coupled with the delivery of engineering designs, data and specifications for ONGC's use under the contract, was treated as making available technical knowledge and therefore as fees for included services / royalty taxable in India under Article 12.

Conclusion: The receipts were held to be taxable in India only to the extent attributable to inspection and boroscoping in India, and to the extent attributable to modifications and replacement work involving transfer of technical information; the balance relating to overhauling abroad was not taxable in India under the DTAA.

Issue (ii): Whether tax was required to be withheld under section 195 of the Income-tax Act on the apportioned consideration.

Analysis: Since part of the consideration was held chargeable to tax in India, the payer was required to withhold tax on that taxable portion. The obligation to deduct tax was confined to the amount apportioned as taxable under the ruling.

Conclusion: Tax was held deductible under section 195 on the portion of the consideration found taxable in India.

Final Conclusion: The ruling upheld Indian taxability only in part by apportioning the contract consideration between taxable services and non-taxable overseas overhauling, and it correspondingly required withholding on the taxable segment alone.

Ratio Decidendi: Where a composite contract yields separable consideration, only the portion attributable to services rendered in India or to a transfer of technical information that makes available technical knowledge is taxable in India under the DTAA, and withholding applies only to that taxable portion.

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