2019 (7) TMI 609 - HC - Income Tax

TDS on cross-border technical services: work orders construed as Fee for Technical Services, withholding sustained and treaty exceptions denied

Assessment focused on whether cross-border payments for installation, repair and market study qualify as fee for technical services; based on contract ... TDS u/s 195 - payment for Fee for Technical Services - no PE India - applicability of Section 9(1)(vi) and Section 9(1)(vii)(b) - DTAA between India and Srilanka, Germany and UAE - all the authority has held that TDS is deductible - HELD THAT:- If we examine the terms and conditions mentioned in the work order, more particularly the scope of work and the various clauses contained therein, we have no hesitation to hold that the nature of activity done in Srilanka is not mere construction or assembly or mining like project. Admittedly, the installation of wind turbine is a highly skilled and technical work. The various clauses in the work order clearly demonstrates the scope of work and therefore, we cannot but hold that the AO was right in concluding that the services rendered by M/s.WFPL is in the nature of Fee for Technical Services. Similarly, with regard to the services rendered by M/s.WRS, Germany was stated by the assessee to be a repair work. The AO after taking note of what is the type of repair work which would accrue in wind turbine, concluded that the repairs are not mundane repairs but require highly sophisticated techniques and accordingly held that it is in the nature of technical services. After analysing the type of services rendered by M/s.E&Y at UAE, the AO held that the market study is in the nature of technical services and the remittance is to be treated as Fee for Technical Services. We find that there is no error in the said conclusion especially when it has been rendered on appreciation of the scope of work based on the documents placed by the assessee before the AO. Therefore, we find that the conclusion arrived at by the two authorities and the Tribunal on all the three issues does not call for interference. Delhi Court in Havells India Ltd [2012 (5) TMI 449 - DELHI HIGH COURT] after analysing Section 9(1)(vii)(b) has held that in order to get the benefit of the first exception it is not sufficient for the assessee to prove that the technical services were not utilised for its business activities of production in India, but it is further necessary for the assessee to show that the technical services were utilised in a business carried on outside India and further in order to fall within the second exception provided in Section 9(1)(vii)(b), the source of the income, and not the receipt, should be situated outside India. The decision in the case of Havells India Ltd.(supra) would apply with full force to the case on hand. In any event, as observed by us earlier the finding rendered by the Assessing Officer, affirmed by the CIT(A) and the Tribunal revolves entirely on the interpretation of the terms and conditions of the work order/contract and in the absence of any perversity, we decline to interfere in the matter as no substantial question of law arises for consideration. Issues Involved:1. Taxability of payments made to M/s. Windforce Private Limited, Sri Lanka under Section 9(1)(vi) and Section 9(1)(vii)(b) of the Income Tax Act, 1961.2. Taxability of payments made to M/s. Wingtec Rotor Services, Germany under Section 9(1)(vii) of the Income Tax Act, 1961 and Article 7 of the DTAA between India and Germany.3. Taxability of payments made to M/s. Ernst & Young, UAE under Section 9(1)(vii) of the Income Tax Act, 1961 and Articles 5, 7, and 14 of the DTAA between India and UAE.Issue-Wise Detailed Analysis:1. Taxability of Payments to M/s. Windforce Private Limited, Sri Lanka:The primary issue was whether the payments made by the assessee to M/s. Windforce Private Limited (WFPL) for services rendered outside India were subject to Tax Deducted at Source (TDS) under Section 9(1)(vi) and Section 9(1)(vii)(b) of the Income Tax Act, 1961. The assessee argued that the services were provided outside India and WFPL had no Permanent Establishment (PE) in India, thus the transactions should not be taxable in India. However, the Assessing Officer (AO) held that the services rendered by WFPL were technical in nature and fell under 'Fee for Technical Services' as per Article 12 of the India-Sri Lanka DTAA, making them liable for withholding tax at 10%. The AO also considered the payments as royalty for the right to use industrial, commercial, or scientific equipment (cranes), thus subject to TDS. The CIT(A) and the Tribunal upheld the AO’s findings, emphasizing the technical nature of the services and the applicability of Article 12 of the DTAA.2. Taxability of Payments to M/s. Wingtec Rotor Services, Germany:The second issue concerned the payments made to M/s. Wingtec Rotor Services (WRS) for repair services on rotor blades. The assessee contended that these were mere repair charges and not subject to TDS. The AO, however, determined that the repairs were highly technical and sophisticated, classifying them as 'Fee for Technical Services' under Section 9(1)(vii) of the Act and Article 12 of the India-Germany DTAA. The CIT(A) and the Tribunal affirmed this view, holding that the nature of the services rendered was indeed technical and thus taxable in India.3. Taxability of Payments to M/s. Ernst & Young, UAE:The third issue was regarding the payment made to M/s. Ernst & Young (E&Y) for a market study on wind energy. The assessee argued that this was a business profit under Articles 5, 7, and 14 of the Indo-UAE DTAA and not subject to TDS as E&Y did not have a PE in India. The AO classified the market study as 'Fee for Technical Services' and also considered it as royalty under the DTAA, making it liable for TDS. The CIT(A) and the Tribunal upheld the AO’s decision, emphasizing that the market study involved technical services and thus fell under the taxable category.Judgment:The High Court dismissed the appeal, agreeing with the lower authorities and the Tribunal. The Court held that the services provided by WFPL, WRS, and E&Y were technical in nature and thus taxable under the respective DTAAs and the Income Tax Act. The Court emphasized that the findings were based on the terms and conditions of the contracts and the nature of the services provided, which were technical and sophisticated, warranting TDS. The Court declined to interfere with the Tribunal's findings, as no substantial question of law arose, and the findings did not suffer from perversity. The appeal was dismissed with no costs.