Composite contract receipts and crystallised liability treatment under the DTAA and tax rules for project execution

Composite operation and maintenance receipts involving advisory support, technical guidance, training and project-related services were characterised as business income under the DTAA's business profits article, rather than fees for technical services. A contractual payment to ETPL for customs clearance and transportation services was treated as a crystallised business liability and allowed as expenditure. The turnkey power project receipts from supervision, erection and maintenance were brought within the special computation rule for foreign companies under section 44BBB, while supervision fee remained taxable under Article 12(2) as fees for technical services. Interest under section 234B was held not leviable on the non-resident assessee.

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Issues: (i) whether receipts from the operation and maintenance contract were to be treated as fees for technical services or as business income under the DTAA; (ii) whether the amount paid to ETPL was an allowable crystallised business liability or a contingent liability; (iii) whether receipts from supervision, erection and maintenance of the gas turbine plant were taxable at 10% under section 44BBB; (iv) whether supervision fee was taxable under Article 12(2) of the DTAA; (v) whether interest under section 234B was leviable on a non-resident assessee.

Issue (i): Whether receipts from the operation and maintenance contract were to be treated as fees for technical services or as business income under the DTAA.

Analysis: The receipts arose from a composite arrangement involving advisory services, technical guidance, on-site training, installation-related support and construction-linked activities. Such a composite contract was not confined to managerial, technical or consultancy services. The decisive character of the receipt was therefore not fee for technical services, but income from business operations governed by the business profits article of the treaty.

Conclusion: The receipt was taxable as business income under Article 7(3) of the DTAA and not as fees for technical services.

Issue (ii): Whether the amount paid to ETPL was an allowable crystallised business liability or a contingent liability.

Analysis: The payment was made under an existing contractual arrangement for customs clearance and transportation services connected with the project. The liability had arisen in the ordinary course of business and had crystallised during the year. The record did not show repayment by ETPL or any material to dislodge the assessee's claim, while the Revenue had not established that the liability remained merely contingent. The amount was, in substance, an ascertained business expenditure.

Conclusion: The payment to ETPL was an allowable crystallised liability and the addition was deleted.

Issue (iii): Whether receipts from supervision, erection and maintenance of the gas turbine plant were taxable at 10% under section 44BBB.

Analysis: The work fell within the scope of a turnkey power project. Activities such as erection, commissioning, supervision and maintenance were ancillary to the execution and making operational of the plant and were part of the composite turnkey obligation. The receipts were therefore subject to the special computation rule applicable to foreign companies engaged in such projects.

Conclusion: The receipts were taxable at 10% under section 44BBB.

Issue (iv): Whether supervision fee was taxable under Article 12(2) of the DTAA.

Analysis: The supervisory fee had already been held in the assessee's own case to fall within the treaty provision dealing with fees for technical services. No distinguishing feature was shown to depart from that view, and the treaty characterization continued to govern the tax treatment.

Conclusion: The supervision fee was taxable under Article 12(2) of the DTAA.

Issue (v): Whether interest under section 234B was leviable on a non-resident assessee.

Analysis: The assessee was a non-resident and the issue had already been decided against levy of such interest in the assessee's own case. Following that position, advance tax liability did not arise in the manner required for section 234B interest.

Conclusion: Interest under section 234B was not leviable.

Final Conclusion: The assessee succeeded on the principal dispute concerning characterization of O&M receipts and deduction of the ETPL payment, while the Revenue failed on its challenges except on the specific tax treatment of the turnkey and supervision-related receipts. The cross appeals were therefore disposed of with the assessee's appeal allowed and the Revenue's appeal dismissed.

Ratio Decidendi: A composite contract containing advisory, training, installation and project-support elements is not to be mechanically treated as fees for technical services where its dominant character is business execution, and a contractual liability that has crystallised in the year is allowable as business expenditure.

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