2014 (2) TMI 1065 - AT - Income Tax

Income Tax Appellate Tribunal confirms Fees for Technical Services classification

The ITAT upheld the CIT(A)'s decision, classifying the income as Fees for Technical Services (FTS) and subject to a 10% tax rate under Section 115A and ... Applicability of section 115A(1)(b)(BB) and Section 9(1)(vii) of the Act - Business income or fee for technical services - Services in relation to construction of pipeline project - Responsibility to execute contract - Whether the assessee’s company is providing technical services and the receipts to be treated as business income or not - Held that:- The decision in Joint Stock Company Zangas Versus ADIT (International Taxation), Ahmedabad [2011 (8) TMI 370 - ITAT AHMEDABAD] followed - Even if extra responsibility of the assessee is there as per the consortium agreement and as per the terms of contract awarded by GAIL to the consortium, the assessee has not done those extra activities and the consideration received by the assessee is as per the cooperation agreement for the activities provided in the cooperation agreement and having accepted by the Assessing Officer the amount of consideration received by the assessee at 3 per cent of gross receipts of the consortium, it has to be accepted that the same is for providing FTS as per the cooperation agreement. The assessee was the leading partner of the consortium, the entire construction work of the project in the hands was done by the assessee and the assessee's activities are not confined to mere providing of FTS - the assessee is required to provide design and engineering of various aspects and is also required for preparing the welding procedure and is also required to review the work procedure for pipeline laying and in addition to this, the assessee is required to depute experts for site review and implementation by KPTL and technical supervision provided by the assessee. No case has been made out by the Assessing Officer to show that section 115A and section 9(1)(vii) are not applicable in the present case as per which the income of the assessee with regard to PDPL project is liable to tax @ 10 per cent as has been claimed by the assessee. - AO directed to apply the provisions of sub-clause BB of clause (b) of sub-section (1) of section 115A along with section 9(1)(vii) of the Act - the order of the CIT(A) confirmed but the AO is directed to verify that 96% receipts of contract has been disclosed by it in case of KPTL and tax has been paid on it – Decided in favour of Revenue. Issues Involved:1. Classification of income as business income or fees for technical services (FTS).2. Existence of a Permanent Establishment (PE) in India.3. Applicability of Article 12 of the Indo-Russia DTAA and Section 9(1)(vii) of the Income Tax Act, 1961.4. Applicability of Section 115A and Section 44DA of the Income Tax Act, 1961.Detailed Analysis:1. Classification of Income as Business Income or Fees for Technical Services (FTS):The primary issue is whether the income received by the assessee should be classified as business income or fees for technical services (FTS). The Revenue contended that the assessee's role in the project was extensive, involving project management, review of drawings, and other responsibilities, thus treating the receipts as business income. However, the CIT(A) and ITAT concluded that the income should be treated as FTS. The ITAT referred to the cooperation agreement, which specified that the assessee would provide technical guidance and consultancy, and the income received (3% of the project consideration) was for these services. The ITAT upheld that the activities undertaken by the assessee did not fall within the exclusion category of Explanation (2) to Section 9(1)(vii) of the Income Tax Act, 1961, and thus should be taxed as FTS.2. Existence of a Permanent Establishment (PE) in India:The A.O. argued that the assessee had a PE in India as the project duration exceeded 12 months, making Article 12 of the DTAA inapplicable and taxing the income as business profits under Article 7 of the DTAA. The CIT(A) did not find it necessary to decide on the existence of a PE, as the income was already determined to be taxable under Section 115A and Section 9(1)(vii). The ITAT confirmed this approach, noting that the income from the PDPL and VDPL projects should be taxed as FTS and not as business profits.3. Applicability of Article 12 of the Indo-Russia DTAA and Section 9(1)(vii) of the Income Tax Act, 1961:The assessee claimed that the income should be taxed as FTS under Article 12 of the Indo-Russia DTAA at a rate of 10%. The ITAT agreed, stating that the activities undertaken by the assessee were technical services and not construction or assembly projects, which would have excluded them from the definition of FTS under Explanation (2) to Section 9(1)(vii). The ITAT referenced previous tribunal decisions, including Voith Siemens Hydro Kraftwerkstechnik GMBH & Co. and Aditya Birla Nuvo Ltd., to support this conclusion.4. Applicability of Section 115A and Section 44DA of the Income Tax Act, 1961:The ITAT discussed the applicability of Section 115A, which taxes FTS at a rate of 10%. The ITAT noted that Section 44DA, which applies to income effectively connected with a PE, was not relevant in this case as the A.O. had not established such a connection. The ITAT directed the A.O. to apply Section 115A along with Section 9(1)(vii) and tax the income at 10%.Conclusion:The ITAT upheld the CIT(A)'s decision to classify the income as FTS and tax it at 10% under Section 115A and Section 9(1)(vii) of the Income Tax Act, 1961. The ITAT confirmed that the activities undertaken by the assessee did not constitute a construction or assembly project, and thus did not fall within the exclusion category of Explanation (2) to Section 9(1)(vii). The existence of a PE was deemed irrelevant for this determination. The ITAT also directed the A.O. to verify that KPTL had disclosed and paid tax on its share of the contract receipts. The Revenue's appeal was ultimately allowed, with the A.O. directed to ensure compliance with these findings.