Fee for technical services test failed where routine sorting, rework and rust-removal work lacked specialised technical skill.

Charges paid to overseas entities for segregation, rework, sorting, deburring and rust removal were held not to constitute fee for technical services under Explanation 2 to section 9(1)(vii), because the work was routine, manual or mechanical, and performed to predetermined specifications without specialised technical skill, scientific process or technical consultancy. The invoices and commercial setting showed standard operational services rather than technical assistance. On that basis, the disallowance was deleted and the Revenue's appeal failed.

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Issues: Whether segregation, rework, sorting, deburring and rust-removal charges paid to overseas entities constituted fee for technical services under Explanation 2 to section 9(1)(vii) of the Income-tax Act, 1961, so as to attract tax deduction at source.

Analysis: The activities carried out by the overseas parties were examined in their actual commercial setting and found to be routine processes of inspection, sorting, segregation, rework, deburring and rust removal performed manually or mechanically according to predetermined specifications. The work did not involve any specialized or high-end technical skill, any new scientific process, or any alteration of the technical specifications of the goods. The invoices and the nature of services showed standardized operational work rather than technical consultancy or technical assistance.

Conclusion: The charges were not fee for technical services and the disallowance was rightly deleted. The Revenue's appeal failed.

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