Installation and commissioning linked to equipment supply fell outside fees for included services, so no withholding was required.

Installation and commissioning charges paid for a SCADA system were treated as ancillary and subsidiary to the related supply contract, because the agreements were connected, executed on the same date and tied to the same letter of intent. On those facts, the consideration did not amount to fees for included services under Article 12(5)(a) of the India-Canada DTAA and was not chargeable to tax in India in the hands of the non-resident recipient. Tax was therefore not required to be withheld, and the disallowance under section 40(a)(i) was deleted. Separately, the incidental expense disallowance was restricted to 25% on the same factual basis as the earlier year.

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Issues: (i) Whether installation and commissioning charges paid for SCADA system were chargeable to tax in India so as to require deduction of tax at source and attract disallowance under section 40(a)(i); (ii) Whether the incidental expenses disallowance was liable to be restricted to 25%.

Issue (i): Whether installation and commissioning charges paid for SCADA system were chargeable to tax in India so as to require deduction of tax at source and attract disallowance under section 40(a)(i)

Analysis: The payment was made under connected agreements entered into on the same date and pursuant to the same letter of intent. The installation and commissioning work related only to the SCADA system supplied under the related contract. On the facts, the services were held to be ancillary and subsidiary, as well as inextricably and essentially linked, to the sale/supply of the system. The amount therefore did not constitute fees for included services under Article 12(5)(a) of the India-Canada DTAA and was not chargeable to tax in India in the hands of the non-resident recipient.

Conclusion: The assessee was not liable to deduct tax at source on the payment, and the disallowance under section 40(a)(i) was rightly deleted.

Issue (ii): Whether the incidental expenses disallowance was liable to be restricted to 25%

Analysis: The Tribunal followed its earlier order in the assessee's own case for the preceding assessment year on the same facts and accepted the restriction of disallowance to 25% where the expenses were not fully vouched and verifiable.

Conclusion: The restriction of disallowance to 25% was upheld.

Final Conclusion: The Revenue's challenge failed on both issues, and the deletion of the principal disallowance as well as the partial restriction of the incidental expense disallowance were sustained.

Ratio Decidendi: Where installation and commissioning services are integral to and inseparably linked with the supply of the same equipment, the consideration for those services may fall outside fees for included services and no tax deduction at source is required on that payment.

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